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FOREX MANAGEMENT

BRETTONWOOD SYSTEM

&

SMITHSONIAN AGREEMENT

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WHAT IS FOREX?

The foreign exchange market

(FOREX) is a worldwide decentralized

overthecounter financial market

for the trading of currencies.

In simple words, it is a place where

one currency is exchanged with

another currency based on

fluctuation rates.

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FAILURE OF GOLD STANDARD

SYSTEM

Rigid discipline on monetaryauthorities

Full employment had not beentargeted

High political cost

Impossible to maintain gold parity

ratio in critical times

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INTODUCTION TO BRETTON

WOOD SYSTEM

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OVERVIEW

In July 1944, 730 delegates from 40countries met at Bretton Woods,Hampshire in US

To initiate the process of reviving worldmonetary system

This system was named as Bretton WoodsSystem

By 1946, 2 supranational institutions wereformed namely:

A) International Monetary Fund (IMF)

B) World Bank

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FEATURES OF AGREEMENT

Modified version of GES

Bretton Woods international monetarysystem reflected mostly US interests

Convert US Dollar freely into Gold at afixed parity of 35$ per ounce (1ounce=28.35gms)

Countries let an international organizationaccept decisions about exchange rates forthe first time in history by signing the IMFstatute

This system was referred as Adjustable

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BASIC ELEMENTS OF THIS

SYSTEM

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EXCHANGE RATE

Convertibility of dollars for gold at$35=1 ounce

Fixing the par value of each nationalcurrency in terms of $

Exchange rate could fluctuate within a

band of 1 percent above or below thepar value

Possibility of changing the par value incase of fundamental disequilibria

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EXCHANGE RATE SYSTEMS

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PEGGED OR FIXED EXCHANGE

RATE SYSTEMS

Forges a direct link between inflation

differentials and employment levels

Can result in large adjustments

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FLOATING EXCHANGE RATE

SYSTEMS

Allows exchange rates to adjust for

inflationdifferences

Allows employment levels andwages to

equalize through the exchange

rate mechanism

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INTERNATIONAL LIQUIDITY

Establishment of the IMF, based on aquota and/or drawing rights system ofall member countries

Each nation should pay 25% of its quota ingold or $

the remainder in its own currency

A member nation could borrow from theIMF to finance temporary balanceofpayments deficits:

International liquidity too small for normal

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REMOVAL OF RESTRICTIONS ON

CURRENT ACCOUNT TRANSACTIONS

Restrictions on international liquidcapital flows were explicitlypermitted

In the statute to allow nations toprotect their currencies against

large destabilizing internationalmoney flows

Removal of all restrictions on the

current account transactions

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ESTABLISHMENT OF IMF

Central goal of the IMF:

Making a stable exchange rates systemcome true

Providing borrowing facilities for

nations in temporary balanceofpayments difficulties

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THE NIXON SHOCK

August 1971 Richard Nixon announces thatUS would no longer exchange dollars for

gold

Imposes surcharge imports into the US in

an attempt to force a realignment of

other currencies exchange rates

Move unexpected and done withoutconsultation

Move heralds the beginning of a floating

exchange rate system

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BREAKDOWN OF BRETTON WOODS

SYSTEM

Balance of Payment deficit

Foreign country holdings increased

Dollar was not devalues by US

Rising capital mobility

Triffins dilemma

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COLLAPSE OF BRETON WOODS SYSTEM

6

4

2

0

2

4

6

U.S.

BalanceonGo

ods

andS

ervicesin$Billions

58 59 60 61 62 63 64 65 66 67 68 69 70 71

Year

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INTRODUCTION TOSMITHSONIAN AGREEMENT

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OVERVIEW

10 leading nations met at the Smithsonian

on December 16 and 17, 1971

The Smithsonian Agreement was a new

system of exchangeparity values

Nixon hailed this agreement as the mostsignificant monetary agreement in the

history of the world.

Valid only for 14 months

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ELEMENTS OF THIS AGREEMENT

Raise the price of gold from $35 to $38

i.e. 7.9% devaluation of US dollar

European countries & Japan agreed to

revalue their currencies

Exchange rate fluctuation band expanded

to +/2,25 percent

Relative monetary stability worldwide in

1972

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CURRENT CURRENCY

ARRANGEMENTS

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1. Free (clean) float

It is closest to perfectcompetition, because there is nogovernment intervention and largeamounts of various monies are being

traded by thousands of buyers and sellers

2. Managed (dirty) float Governmentsintervene in the currency markets as they

perceive that national interests to beserved.

3. Fixed peg A country pegs the value of

its currency at a fixed rate to another

CURRENCY EXCHANGE

AGREEMENTS

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BIBLIOGRAPHY

www.wikipedia.com

http://www.dailyreckoning.com.au/bretton-woods-agreement/2006/11/29/

http://www.swlearning.com/finance/butler/butler3e/powerpoint/handout02.pdf

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PRESENTED BY

Ankita Chaudhari8

Arun Gupta9

Atul Patil

10 Bhavik Dhaduk11

Chaanakshay Lamba12

Chintan Shah13

Darpan Berry14

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