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International Monetary System - History

International Monetary System - History. Fixed Exchange Rates & Gold Standard, WWII - 1971 Floating Exchange Rates, 1971 - Present. Floating Exchange Rates, 1971 - Present. Supply of $’s in International Markets: Imports American Travel Abroad U.S. Government Aid

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International Monetary System - History

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  1. International Monetary System - History • Fixed Exchange Rates & Gold Standard, WWII - 1971 • Floating Exchange Rates, 1971 - Present

  2. Floating Exchange Rates, 1971 - Present • Supply of $’s in International Markets: • Imports • American Travel Abroad • U.S. Government Aid • Payment of Interest, Dividend & Profits abroad • Speculation

  3. Floating Exchange Rates, 1971 - Present • Demand for $’s in International Markets • Exports • Foreign Travel to U.S. • Foreign Investment in U.S. • Receipt of Interest, Dividends & Profit • Speculation

  4. Floating Exchange Rates, 1971 - Present • Key Determinants • Relative Interest Rates • Relative Inflation Rates • Relative Economic Growth Rates

  5. Key Currency Cross RatesLate New York Trading Monday, January 6, 2003 Source: Reuters

  6. Exchange Rates The foreign exchange mid-range rates below apply to trading among banks in amounts of $1 million and more, as quoted at 4 p.m. Eastern time by Reuters and other sources. Retail transactions provide fewer units of foreign currency per dollar.

  7. Exchange Rates

  8. Exchange Rates

  9. Exposures To Foreign Currency Risk • Economic Exposure • Transactions Exposure • Translation Exposure

  10. Economic ExposureOriginal Impact of Exchange Rate Movements on Earnings: Madison Inc. (in millions)

  11. Economic ExposureOriginal Impact of Exchange Rate Movements on Earnings: Madison Inc. (in millions) Source: J. Madura, International Financial Management

  12. Transactions ExposureMethods to Deal with Foreign Exchange Risk EXPECTED FOREIGN CURRENCY (FX) CHANGE DEPRECIATION APPRECIATION POSITION in FOREIGN CURRENCY (FX) • Invoice Policy • Accelerate Collections • Sell Forward or Futures contract to • deliver FX for $s at forward/future • rate and time • Borrow FX from foreign bank, • convert to $s, invest in U.S. • Buy Currency Put Options • “LONG” • EXPECTED RECEIPTS • (e.g. AR) • NET ASSET POSITION • Invoice Policy • Accelerate Payments • Buy a Forward or Futures contract to • purchase FX for $s at the • forward/futures rate and time. • Use case or borrow U.S. $s, convert • and buy foreign securities. • Buy Currency Call Option • “SHORT” • OBLIGATIONS • (e.g. AP) • NET LIABILITY POSITION

  13. International Capital Budgeting K=20% YEAR 0123 CF’S (FCU’S) (390 FCU’S) 80 FCU’S 300 FCU’S 225 FCU’S PRESENT VALUE FACTOR 1.0 .8333 .6944 .5790 ----------------------------------------------------------------------------------------------------------- PRESENT VALUE (390) 66.66 208.32 130.275 NET PRESENT VALUE (FCU’S) 15.255 YES, ACCEPT ------------------------------------------------------------------------------------------------------------------------------------------------------- SCENARIO I Foreign currency Converted to U.S. Dollars (Depreciation of FCU, APPRECIATION OF $) Exchange Rate 1.0 FCU’S/$ 1.1 1.25 1.35 CF’S ($) (390) $72.72 $240.00 $166.67 PV of CF’S ($) (390) 60.60 166.66 96.50 ---------------------------------------------------------------------------------------------------------- NET PRESENT VALUE ($) (66.24) NO, REJECT SCENARIO II Appreciation of FCU, Depreciation of $ Exchange Rate 1.0 FCU’S/$ .9 .85 .8 PV OF CF’S ($) (390) $74.07 $245.08 $162.84 ---------------------------------------------------------------------------------------------------------- NET PRESENT VALUE ($) 91.99 YES, ACCEPT

  14. Translation ExposureTranslation of Subsidiary’s Financial Statements under FASB-52 Rules (figures in thousands)

  15. Translation ExposureTranslation of Subsidiary’s Financial Statements under FASB-52 Rules (figures in thousands) -3,100 (Cumulative Translation Account) +5,100 (Accumulated Earnings)

  16. Translation ExposureTranslation of Subsidiary’s Financial Statements under FASB-52 Rules (figures in thousands) Source: J. Madura, International Financial Management

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