2. bop & exchange rate determination
TRANSCRIPT
8/6/2019 2. BOP & Exchange Rate Determination
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Chapter 2
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� Importance: Increased interdependence in the Global Village
Increased prosperity
Best utilization of natural resources & specialization of countries
WTO
Technology has connected the world
LPG (Liberalization, Privatization & Globalization) in 1991
� Scope of International Finance
Foreign Trade (Export & Import)
Foreign Direct Investment
Multinational Companies
International Financing
Creation of Trading Blocks
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� Different Financial policies & tax rates of different
countries i.e. different financial system
� Trade Barriers : Import quota & tariffs, Export subsidies
� Different Currencies
� Different laws
� Different risk due to different environment (political-
social)
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Trading blocks are formed by geographically close countries
� Free Trade Areas
Elimination of tariffs & quantitative import restriction
� Custom Unions
Setting common trade barriers for outsiders
� Common Market
Free flow of factors of production: Labour & capital
� Economic Union
Common Bank, laws, taxes & currency Eg. European Union of 15 countries of
Europe with common currency Euro
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A. Current Account
1. Merchandise-
1. Exports ( on f. o. b. (free on board) basis)
2. Imports (on c.i.f. (cost, insurance & freight) basis)
2. Invisible (a + b + c)
a. Services
i. Travel
ii. Transportation
iii. Insurance
iv. G.n.i.e. (Government not included elsewhere)
v. Miscellaneous
� Software Services
� BusinessServices
� FinancialServices
� Communication Services
b. Transfers
i) Official
ii) Private
c. Income
i) Investment Income
ii) Compensation of EmployeesTotal Current Account (I+II)
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B. CAPITAL ACCOUNT
1. Foreign Investment (a+b)
a) Foreign Direct Investment (i+ii)
b) Portfolio Investment
2.Loans (a+b+c)
a) External Assistance
i) By India
ii) To India
b) Commercial Borrowings (MT<)
i) By India
ii) To India
c) Short Term to India
3. Banking Capital (a+b)
4. Rupee Debt Service
5. Other Capital
Total Capital Account (1to5)
C. Errors & Omissions
D. Overall Balance (Total Capital Account, Current
Account and Errors & Omissions (A+B+C))
E. Monetary Movements (i+ii)
i. I.M.F
ii Foreign Exchange Reserves
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Exchange Rate - Amount of one currency neededto purchase one unit of another.
± Spot Rate of Exchange - Exchange rate for animmediate transaction.
± Forward Exchange Rate - Exchange rate for aforward transaction.
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� Exchange rates
± Direct quotations vs. Indirect quotations
± Direct: Rs per unit of foreign currency
» Example: Rs 50 per US Dollar
± Indirect: Units of foreign currency per Rupees
» Example: 0.02 USD per Rs
± Cross Rate: Units of foreign currency(f1) in another foreign currency (f2) and
units of f2 and domestic currency.
� Exchange Rates: Forex Operators¶ rates & Interbank rate
± Bid Rate: Buying price of Forex operator
± Ask rate: Selling price of Forex operator
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� Fixed
� Floating
Free Float Managed Float
� Hybrid
Crawling Peg
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� Bimetallism: Before 1875
� Classical Gold Standard: 1875-1914
� Interwar Period: 1915-1944� Bretton WoodsSystem: 1945-1972
� The Flexible Exchange Rate Regime: 1973-Present
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� Letter of Credit� ECGC� Netting & Matching� Hedging
Forwards
Futures Options
Call Option Put Option
Swaps Others