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8/16/2019 International Business Law - Chapter 6
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Money and Banking
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Money
• Money: anything customarily used as a medium ofexchange and a measure of value
– 3 characteristics• As a means of exchange
• As a unit of measure or value and
• As a medium for storing value over time
– Can be both private and ocial• Private money: usually a basket of currencies can also be rare metal
or other commodity easily transferable and reasonably nonspoilable – !nly for making payments bet"een private parties "ho agree in advance to its
use
• !cial money: unit of exchange issued by a government agency #Mo$
%o&' or government(controlled )nancial institution #central bank' – Can be used to pay debts of any kind public or private*
– +ome special types #+%,s' only used by governments- to governments
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Money . cont/d
• &he value of money – 0alue of property and services is measured by
money• &he value of ocial money is nominally constant
– Contract to purchase a widget for 10 units of X = 10X
– 10X does not change, even if purchasing power/valuechanges
– Nominalism•
Some states have minimized the impact in severecases – ermany, !rgentina, "elgium #ruagay
» $f other party fails to pay in a timely fashion
– #S, $taly and #% & revaluation is N'( allowed
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Money . cont/d
• &he value of money #cont/d'
– Nominalism & )cont*d+• ossi-le to avoid in special case where
currency delivered as a commodity – .are coin
– .ichard v !#" & foreign currency case
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Money . cont/d
• &he choice of money – oney of account & denes amount of o-ligation
– oney of payment & money used to pay that
o-ligation• $*ll sell you it for 10#S )money of account+ so give
me 210,0003N )money of payment+
– $n contracts, parties should determine thea-ove, 4#S place of payment• ost countries allow foreign money o-ligation to -e
satised -y payment in local currency at place of payment
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Money . cont/d
• &he choice of money #cont/d' – Place of payment
• !-sent selection of the parties, courts will
determine place of payment & domestic laws vary – 567 #N Convention of Contracts for $nternational Sale of
oods
» lace of payment is place of delivery
• $f not named, then seller*s place of -usiness
– arties to a contract should name all three• !llows courts of those nations to resolve disputes
over interpretation or performance of contract – 56ample8 case 9:1 !rgentina
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Money . cont/d
• Maintaining monetary value – ;ow does seller ensure that he will receive a
fair price for the product<
– $nation )seller+ eation )-uyer+• aintenance of value clause
– rice ad>usted -y ination rate
• esignating money of account in sta-le currency – usually #S dollar, 5# euro, ? yen, #% pound
• #se of currency -as@et – Selected group of currencies whose weighted average is
used to dene amount of o-ligation
– Can -e ad hoc or AoBcial -as@et li@e $D*s S.
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1nternational Monetary $und
• !rigin of the 1M$
– 2stablished by 4 meeting in 5uly 6788• Bretton 9oods Conference
– Purpose to deal "ith• %iculties of currency exchange
• !ther %epression(era economic policies – Protectionist taris and other aggressive trade
policies
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1nternational Monetary $und .
cont/d
• !rigin of the 1M$ #cont/d'
– 1nternational monetary system . set ofrules and procedures "hich dierent
national currencies are exchanged foreach other in "orld trade
– 6st: gold standard: gold coins of
standard speci)cations – ;nd: gold bullion standard: re
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1nternational Monetary $und .
cont/d
• !rigin of the 1M$ #cont/d'
– &"o main problems• Currency inconvertibility
• =ack of standard for determining value of nationalcurrencies
– Collapse of the gold bullion standard
– 1M$ made overseer of member states/monetary and exchange rate policiesguardian of a >code of conduct/
– and no" surveillance
– and technical support
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1nternational Monetary $und .
cont/d
• 1M$
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1nternational Monetary $und .
cont/d
• 1M$
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1nternational Monetary $und .
cont/d
• !rganiation of the 1M$ – Board of overnors . highest authority
• overnor-alternate representing each member
• Meet once a year – 0oting by mail-other means throughout the year
– 2xecutive Board• ;8 directors managing director
• Meet at least 3x "eek
– Managing %irector-head of sta .appointed by 2xecutive Board
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1nternational Monetary $und .
cont/d
• 1M$ operations . obligates membersto observe >code of conduct/
– Eeep other members informed of its
currency exchange arrangements
– ,efrain from placing restrictions oncurrency exchange
– Pursue economic policies to increase itsnational "ealth #and other memberstates'
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1nternational Monetary $und .
cont/d
• 1M$ operations #cont/d' – Compliance "ith code essentially voluntary
• 1M$ can exert >moral pressure/
• Can declare not eligible to borro" money• Can be expelled
– 1M$ responsible for• +upervising currency exchange
• =ending money to support member/scurrency-economy
• Providing auxiliary services to assist members
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Currency 2xchange
• Currency exchange obligations of 1M$ memberstates – Fistory
• 1M$ par value system . declared value
– +econd Amendment• !ther than gold
• Pegged to other currencies +%, or other currencybasket
• !r Goat – +ome re
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Currency 2xchange . cont/d
• 2nforcement of exchange controlregulations of 1M$ member states – 2xchange contracts contrary to exchange
control regulations are unenforceable• Prevents one member from frustrating control of
another member
• %eters private persons from violating exchange
controls – Can be used:
• As a defense as a cause of action #by a memberby a person'
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Currency 2xchange . cont/d
• 2nforcement of exchange controlregulations of non(1M$ memberstates
– &raditionally states do not enforcerevenue la"s of other states
– As most are members of 1M$ relatively
moot point
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Currency 2xchange . cont/d
• 2nforcement of other exchangecontrol regulations
– $orbids restrictions on
payments-transfers involving currentinternational transaction• Anything other than >capital/ transaction
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Currency 2xchange . cont/d
• 2xemptions for ne" members
– 2xemptions available
– 4ot usually used
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Currency support
• +hort term source of funds
– $rom 1M$
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Currency support . cont/d
• 1M$ $acilities . ,egular
– ,eserve tranche Credit tranche2xtended fund facility +tandby
arrangements Concessional 1M$ facility
• 1M$ $acilities . +pecial #particularsituations'
– Compensatory )nancing facility+upplemental reserve facilityContingent credit lines
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Currency support . cont/d
• 1M$ Conditionality – Access to 1M$/s credit tranches and other facilities
is linked to member/s progress in implementingpolicies to restore balance of payments viability
and sustainable economic gro"th – eneral guidelines: encourage adoption of
corrective measures at an early stage respectdomestic social and political issues limit
performance criteria – 4B: 1M$ arrangements not contractual but
decisions of 1M$ that set out conditions fromcontinued )nancial assistance
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%evelopment Banks
• 9orld Bank #1nternational Bank for,econstruction and %evelopment . 1B,%'
– 1nternational %evelopment Agency #1%A'•
=oans to less developed countries – 1nternational $inance Corporation #1$C'
• =oans to private enterprises
– Manages trust fund of lobal 2nvironment$acility #2$'• $unds to developing countries to address
environmental problems: climate change biologicaldiversity international "aters oone layer depletion
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%evelopment Banks . cont/d
• 1nternational $und for Agricultural%evelopment #1$A%'
– $inancing for proDects that introduce
expand and improve food productionsystems in its developing memberstates
• ,egional development organiations• 4ational development agencies
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%evelopment Banks . cont/d
• Current controversies at 9orld Bank
– $raud
• ,eading H(; 1M$ comparison to9orld Bank
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Bank for 1nternational+ettlements
• Acts as a bank for "orld/s centralbanks
• Promotes international monetarycooperation
• Acts as an agent for internationalsettlements
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,egional Monetary +ystems
• Carry out similar functions as 1M$but on a regional scale
• +ee examples on p 366(36;
• +ee exhibit H(I 2uropean centralbank national central banks
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4ational Monetary +ystems
• &o implement national monetarypolices – Fighest level political . Ministry of
$inance &reasury %epartment – 4ext Central Bank #Bank of 2ngland &he $ederal ,eserve +tate Bank of
0ietnam' – Commercial Banks
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4ational Monetary +ystems . cont/d
• Bank %eposits
– ?history@ of banking
– 4ot as bailor
• 2urocurrency deposit example – 4o" euro . not applicable
– 4ote ((( foreign currency accounts #FE
0ietnam'
• 1nterbank %eposit Market – Most common . Certi)cate of %eposit
#C%'
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4ational Monetary +ystems . cont/d
• $oreign 2xchange Market
– ood example on p* 36J
• $oreign 2xchange Contract – +pot
– $uture
– Fedging
– +peculators
– $or"ard contract
– !ption contract• Call
• Put
• +traddle-spread eagle
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4ational Monetary +ystems . cont/d
• Arbitrage
– Arbitrageur
• &ransfer of money
– 1nstruction
– Bill of exchange-draft
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4ational Monetary +ystems . cont/d
• Branch Banking
– 0arious national policies
– Fost state regulations
• 4orm v + . – +ee case H(I
– Branch v subsidiary #separate incorporatedbody'
– Fost and Fome +tate treatment of branch• +ee p 3;8 3;I
• $oreign bank liability for branch – +ee 04 case
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4ational Monetary +ystems . cont/d
• ConGicts bet"een Fost and Fome+tate ,egulations
– +ee example p 3;J
– +uggested solution
– Case H(K
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