40

ECONOMICS/FINANCE 372 International Finance

  • Upload
    ince

  • View
    50

  • Download
    0

Embed Size (px)

DESCRIPTION

ECONOMICS/FINANCE 372 International Finance. - PowerPoint PPT Presentation

Citation preview

Page 1: ECONOMICS/FINANCE 372 International Finance
Page 2: ECONOMICS/FINANCE 372 International Finance

ECONOMICS/FINANCE 372

International Finance

Course Objective: To develop an understanding of the significance that the existence of different currencies around the world has on economic and financial activity. The causes and effects of exchange rate behavior will be investigated. As in any economics course, the effects of government policies and the role of government are considered. As in any finance course, the profound influence that uncertainty (a.k.a. risk) has on economic and financial behavior is emphasized.

Page 3: ECONOMICS/FINANCE 372 International Finance

The Balance of Payments (BOP) Accounts:

A record of all economic activity that flows between residents of a country and residents of the rest of the world in a given period of time (e.g., a year), where all values are in terms of the country’s own currency.

Page 4: ECONOMICS/FINANCE 372 International Finance

The two primary component accounts of the BOP accounts are:

1) the Capital and Financial Account (formerly known just as the Capital Account)

2) the Current Account.

All transfers of asset ownership are recorded in the Capital and Financial Account (KFA)

All other flows (e.g., of goods, services) across the country’s borders are recorded in theCurrent Account (CA).

Page 5: ECONOMICS/FINANCE 372 International Finance

BOP accounting employs double-entry bookkeeping:

For every credit there is a debit, and For every debit there is a credit.

Page 6: ECONOMICS/FINANCE 372 International Finance

Credits in the CA: a flow (of goods or services) that gives rise to a payment “inward” from a non-resident.

Debits in the CA: a flow (of goods or services) that gives rise to a payment “outward” to a non-resident.

Credits in the KFA: the transfer of the ownership of an asset from a resident to a nonresident.

Debits in the KFA: the transfer of the ownership of an asset from a nonresident to a resident.

Page 7: ECONOMICS/FINANCE 372 International Finance

The Current Account is divided into 3 sub-accounts:

The goods account (CAG) records the flows of goods (across the borders)

The services account (CAS) records the flows of services

The factor services account (CAFS) records the flows of factor services.

 

CA = CAG + CAS + CAFS

Page 8: ECONOMICS/FINANCE 372 International Finance

The Capital and Financial Account (KFA) is also divided into 3 sub-accounts:

The long term, private financial account (KFALP) records the flows of the transfer of ownership across the border of long-term assets by private individuals and institutions.

The short-term, private financial account (KFASP) records the transfer of short-term assets by private individuals and institutions.

The government financial account (KFAGOV) records the acquisition or sale of another country’s currency by the country’s monetary authority.

KFA = KFALP + KFASP + KFAGOV

Page 9: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

Page 10: ECONOMICS/FINANCE 372 International Finance

There are several “Key Balances” that are constructed using these six sub-accounts:

Trade Balance = CAG

Basic Balance = CA + KFALP

Official Reserves Transactions Balance (ORTB)(a.k.a. Overall Balance, or, Official Settlements Balance, or, The “Balance of Payments” or “BOP”) =

CA + KFALP + KFASP

KFAPRIVATE = KFALP + KFASP

Page 11: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

A US resident pays a Canadian $10 in exchange for preparing her taxes, paying with a check on a Chicago bank.

Page 12: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

Tax preparation ($10 worth) is provided by the Canadian accountant to the US resident

Page 13: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

$10

The US resident gives the Canadian a check for $10

Page 14: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

$10

Key Balances:

The CURRENT ACCOUNT (CA) = -$10 (is in deficit by $10)

Page 15: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

$10

Key Balances:

The CAPITAL AND FINANCIAL ACCOUNT (KFA) = +$10 (is in surplus

by $10)

Page 16: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

$10

Key Balances:

The BASIC BALANCE (BB) = CA + KFALP = -$10

Page 17: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

$10

Key Balances:

The (Merchandise) TRADE BALANCE (TB) = CAG = $0

Page 18: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

$10

Key Balances:

The BALANCE OF PAYMENTS (BOP) = CA + KFALP + KFASP = $0

Page 19: ECONOMICS/FINANCE 372 International Finance

A UK resident buys a 5-yr US government bond (from an American) for $20, pays with a check on a British bank.

Page 20: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

$20 $10

The British resident takes ownership of the $20 LT Bond.

Page 21: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

$20 $20 $10

The British resident gives the $20 check to the American.

Page 22: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10

$20 $20 $10

CA = -10 KFA = +10 BB = +10 BOP = 0 TB = 0

Page 23: ECONOMICS/FINANCE 372 International Finance

A US resident receives $30 in interest payments on her 6-mo Peruvian bonds, paid with a check on a Peruvian bank.

Page 24: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10 $30

$20 $20 $10

A US resident provides services to the Peruvian borrower worth $30.

Page 25: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10 $30

$20 $20 $10 $30

A US resident receives the $30 check on the Peruvian bank.

Page 26: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10 $30

$20 $20 $10 $30

CA = +20 KFA = -20 BB = +40 BOP = 0 TB = 0

KFASP = - $40 (is in deficit by $40)

Page 27: ECONOMICS/FINANCE 372 International Finance

US Government buys $40 worth of Yen in the foreign exchange markets with newly printed $’s.

Page 28: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10 $30

$20 $20 $10 $40$30

US Government puts $40 worth of Yen in its vault.

Page 29: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10 $30

$20 $20 $10 $40$30 $40

A foreign resident takes possession of 40 newly printed $’s.

Page 30: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10 $30

$20 $20 $10 $40$30 $40

CA = +20 KFA = -20 BB = +40 BOP = +40 TB = 0

KFASP = 0 (is in balance)

Page 31: ECONOMICS/FINANCE 372 International Finance

A US resident pays $50 for a 180-day Japanese government security, pays with a Houston bank check.

Page 32: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10 $30

$20 $20 $10 $40$30 $40 $50

A US resident takes ownership of the 180-day Japanese government security (worth $50).

Page 33: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10 $30

$20 $20 $10 $40$30 $40 $50 $50

The Japanese government takes possession of the $50 check on the US bank from the US resident.

Page 34: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$10 $30

$20 $20 $10 $40$30 $40 $50 $50

KFASP = 0 CA = +20 KFA = -20 BB = +40 BOP = +40

Page 35: ECONOMICS/FINANCE 372 International Finance

US firm sells $60 in lumber to Taiwan firm and is paid with a check on the Taiwan’s firm account in a US bank.

Page 36: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$60 $10 $30

$20 $20 $10 $40$30 $40 $50 $50

US firm delivers $60 in lumber to Taiwan firm.

Page 37: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$60 $10 $30

$20 $20 $10 $40$30 $40 $50 $50$60

The Taiwan firm gives the check for $60 on the US bank to the US seller.

Page 38: ECONOMICS/FINANCE 372 International Finance

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit

CAG CAS CAFS

KFALP KFASP KFAGOV

$60 $10 $30

$20 $20 $10 $40$30 $40 $50 $50$60

KFASP = -60 BB = +100 BOP = +40 TB = +60

CA = +80 KFA = -80

Page 39: ECONOMICS/FINANCE 372 International Finance

1. A US resident pays a Canadian $10 in exchange for preparing her taxes, paying with a check on a Chicago bank.

2. A UK resident buys a 5-yr US government bond (from an American) for $20, pays with a check on a British bank.

3. A US resident receives $30 in interest payments on her 6-mo Peruvian bonds, paid with a check on a Peruvian bank.

4. US Government buys $40 worth of Yen in the foreign exchange markets with newly printed $’s.

5. A US resident pays $50 for a 180-day Japanese government security, pays with a Houston bank check.

6. US firm sells $60 in lumber to Taiwan firm and is paid with a check on the Taiwan’s firm account in a US bank.

Page 40: ECONOMICS/FINANCE 372 International Finance