Exchange Rate & Forex Management

The Gold Standard. Price of currency fixed in terms gold. No privileged position to any country. Price of currency fixed in terms of gold.

Bretton Woods system: 1945-1972

U.S. dollar was pegged to gold at $35.00/oz. Other major currencies established par values against the dollar. Deviations of 1% were allowed, and devaluations could be negotiated. In a nutshell, the Bretton Woods system was an adjustable peg regime operating under a gold exchange standard in which most currencies were convertible into U.S. dollar and the dollar, in turn, was convertible into gold.

SMITHSONIAN

Agreement about fixed exchange rates ends

AGREEMENT

Jamaica Agreement (1976)

Central

banks were allowed to intervene in the foreign exchange markets to iron out unwarranted volatilities. Gold was officially abandoned as an international reserve asset. Half of the IMFs gold holdings were returned to the members and the other half were sold, with proceeds used to help poor nations. Non-oil exporting countries and less-developed countries were given greater access to IMF funds

Plaza Accord (1985)

G-5

countries (France, Japan, Germany, the U.K., and the U.S.) agreed that it would be desirable for the U.S. dollar to depreciate.

Louvre Accord

( 1987 )

G-7

countries (Canada and Italy were added) would cooperate to achieve greater exchange rate stability. G-7 countries agreed to more closely consult and coordinate their macroeconomic policies.

Fixed Exchange Rate Determination

qFLOATING / FLEXIBLE EXCHANGE RATE . qMARKET DRIVEN RATE . qFIXED EXCHANGE RATE FIXED BY MONETARY AUTHORITY . q q q

Pegging of the Currency

qVALUE OF CURRENCY TIED TO THAT OF OTHER .

q.CURRENCY PEGGED TO SINGLE CURRENCY. qCERTAIN LOWER/UPPER LIMIT ALLOWED . q q

COMPOSITE CURRUNCY PEGGING

Pegging of a currency to a basket of currencies is called composite currency pegging. This system is adopted to avoid frequent adjustment problem caused by the variation in the reserve currency. Under this system, many countries have pegged their currency to more than one currency, mainly to the currencies of their major trading partners.

Floating exchange rate

Currency s value allowed to fluctuate as per market also known as floating currency . Automatically adjust . Pre - empt BOP crisis . intervention by central bank in case of appreciation / depreciation managed float

linked exchange rate

Links exchange rate of a currency to another. No active interference by Govt or Central Bank Exchange rate stabilized by a mechanism Implemented in Hongkong Dollarization Use of foreign currency in parallel or Instead of domestic currency.

Forex Management
FEMA replaces FERA. IN THE WAKE OF LIBERALIZATION NEED OF THE HOUR Tenor & tone drastic. Everything prohibited unless specifically permitted . Imprisonment for minor offences . Person presumed guilty unless proved innocent . FOREIGN EXCHANGE RESERVES
Foreign Currency deposits and bonds held by Central Bank Assets held in DOLLAR , EURO , UK POUND & JAPANESE YEN. Used to back Liabilities e.g Local Currency issued , Bank reserves deposited