Download - Topic 1_The Structure of the Intl Fin System
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Agenda
1. Globalization of international financial markets
2. The structure of the international financial market
1. The eurocurrency market
2. The international equity market
3. The international debt market
4. The foreign exchange (currency market
3. The international monetary system
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1. Go!ai"a#ion o$ $inancia %a&'e#(
The global economy has undergone through a number ofstructural changes in the !ast fe" decades#Real changes liberalization of !roduct and factor markets$
allied "ith technological de%elo!ments
increased out!ut inmany countries and !articularly in the !re%iously centrally!lanned economies
Monetary changes a global commitment to maintain lo"rates of inflation after the boost in inflation in the &'s
Financial changes gro"ing com!leteness and integration of "orld financial markets$ fueled by deregulation and technology
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Go!ai"a#ion o$ $inancia %a&'e#(
Reai#ie( o$ go!a $inancia %a&'e#(# )hort*term nature of ca!ital flo"s +igh turno%er in financial markets ,ulti!licity of agents
+igh number and com!lexity of instruments +igh s!eed "ith "hich market !artici!ants react to ne" information Global reach of financial institutions
I%pica#ion(# Gro"ing integration of financial markets$ including emerging markets -etter financing of current account deficits inancial contagion risks
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Go!a $inancia a((e#( (#oc' *a/e(
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S#oc' o$ go!a $inancia a((e#( a( 0 o$ go!a GD
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I%pac# o$ %a&'e# $/c#/a#ion( on go!a e2/i#3
%a&'e# capi#ai(a#ion
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T+e go!a $inancia %a&'e#pace
A((e#( securities issued by !ublic and !ri%ate bodies(go%ernments$ financial institutions$ com!anies these assets& ality is critical for the stability of the global financial
system
In(#i#/#ion( central banks$ commercial$ and in%estmentbanks their health kee!s the global financial system stable
Lin'age(
interbank net"orks using currency "ithout ready exchange of currencies the market cannot o!erateefficiently
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T+e go!a $inancia %a&'e#pace
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T3pe( o$ a((e#( #&aded in in#. $inancia %a&'e#(
, ex!anded the co%erage in transactions in order to better reflect theinno%ati%e changes in international financial markets in recent years
,aor #3pe( E2/i#3 (ec/&i#ie(
De!# (ec/&i#ie(
De&i*a#i*e(
E2/i#3 (ec/&i#ie( co%er all instruments and records ackno"ledging$
after the claims of all creditors ha%e been met$ claims to the residal
"ales of incor!orated enter!rises maor ty!es# )hares and stocks
0artici!ation or similar documents (such as 5/6s or G/6s
0referred stock or shares that !ro%ide for !artici!ation
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T3pe( o$ a((e#( #&aded in in#. $inancia %a&'e#(
De!# (ec/&i#ie(
maor ty!es# %onds& de'entres& notes gi%e the holder the nconditional right to afied money income or contractally determined "aria'le money incomeand$ "ith some exce!tions (!er!etual securities$ also !ro%ide the holder "ith the nconditional right to a fied sm as a re!ayment of !rinci!al ona s!ecified date or dates include# non!artici!ating !referred stock or shares con%ertible bonds bonds "ith o!tional maturity dates negotiable certificates of de!osit "ith maturities of more than one
year dual currency bonds zero cou!on and other dee! discounted bonds floating rate bonds and indexed bonds asset*backed securities
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T3pe( o$ a((e#( #&aded in in#. $inancia %a&'e#(
Money maret secrities gi%e the holder the nconditional right to
recei"e a stated& fied sm of money on a s!ecified date
traded at a discount in organized markets
discount de!ends u!on the interest rate and the time remaining to
maturity
include treasury bills (T*bills$ commercial and financial !a!er$bankers& acce!tances$ negotiable certificates of de!osit$ and short*
term notes issued under the note issuance facilities
De&i*a#i*e( they gi%e the holder the right to recei%e an economic
benefit in the form of cash or a !rimary financial instrument at somefuture date
include# o!tions on currencies$ interest rates$ commodities$ indices$
etc.7 traded financial futures7 "arrants7 arrangements such as
currency and interest rate s"a!s
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4. T+e (#&/c#/&e o$ in#e&na#iona $inancia %a&'e#(
E/&oc/&&enc3 %a&'e#
In#e&na#iona e2/i#3 %a&'e#
In#e&na#iona de!# %a&'e#
Fo&eign e5c+ange 6c/&&enc37 %a&'e#
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US Domestic Swiss
Market EUROCURRENCY MARKET Domestic
Market
Euro-Swiss Franc
Eurodollar Market
Market
a!anese
Euro-"en Domestic
Market Market
T+e E/&oc/&&enc3 %a&'e#
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T+e E/&oc/&&enc3 %a&'e#
USD GBP
Onshore (USA)
Offshore (Abroad)
Bank depos! n USD
USD deno"na!ed T#b$$s
and bonds
Corpora!e bonds n USD
Bank depos! n GBP
GBP deno"na!ed T#b$$s
and bondsCorpora!e bonds n GBP
Depos! n e%ro#USDBonds n e%ro#USD
Currency dimension
Regulatorydimension
Depos! n e%ro#GBPBonds n e%ro#GBP
1#
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LIBOR
London In#e&!an' O$$e&ed Ra#e 6LIBOR7 ; the interest rate at "hich
large a.m. (
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E/&o LIBOR *(. EURIBOR 8 491:
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E/&o LIBOR *(. EURIBOR 8 491;
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s "hen
8uro!ean banks began acce!ting de!osits in A.). dollars The reser%e*currency status of the dollar "as an im!ortant factor
)ome communist countries (A))6 "ere the earliest source of dollar
de!osits held in 8uro!e
8urobanks de%elo!ed as a result of !rofit considerations The A) financial market "as highly and restricti%ely regulated# Reglation
+ 1@>7 ,nterest *ali-ationTa 1@B37 .olntary Foreign /a!ital Restraints 1@B4
-ritish banks began to offer higher interest rates for A) dollars de!osits
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4.4. E2/i#3 %a&'e#(
T3pe( o$ %a&'e#(rimary marets# stocks are bought from the com!any that
issues them
econdary marets# shares !re%iously issued can be traded
among in%estors =TC %ersus stock exchanges
F/nc#ion( o$ e2/i#3 %a&'e#(=
+el! com!anies to raise ca!ital8nable com!anies to undertake more risk
-y !ricing shares they !ro%ide constant %aluation of firms
)er%e as markets for cor!orate control
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Fac#o&( d&i*ing go!ai"a#ion o$ e2/i#3 %a&'e#(
De%and shift from the !re"alence of indi"idal to the dominance of instittionalin"estors (!ension$ mutual and insurance funds$ institutional traders hedge
funds and in%estment banks
search for 'etter in"estment o!!ortnities and international di"ersification of
holdings
interest in trading "ithout the cost of becoming members indifferent national stock exchanges and follo"ing domestic rules on trading
Tec+noog3 the s!eed of message transmission increased significantly demand from
trading firms to locate their order*generating com!uters as close as !ossible to
the matching engines of exchanges
Reg/a#ion ,arkets ha%e been gradually o!ened to non*residents for trading
)uccess story# 8uro!ean Anion
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Ma>o& #&end( in in#. e2/i#3 %a&'e#(
Ma&'e# con(oida#ion( and %e&ge&( !e#)een e5c+ange(
E/&one5# 649997 merger of the 5msterdam 8xchanges$ -russels 8xchanges$and 0aris -ourse
a single trading !latform ser%ing all members at each of the three subsidiary
exchanges$ "ith access to all shares and !roducts
a single order book exists for each stock$ allo"ing for trans!arency and liquidity$as "ell as a single clearinghouse and !ayment and deli%ery system
NYSE E/&one5# 6499?7 merger of 8uronext and DE)8 2 DE)8 8uronext acquired 5merican )tock 8xchange DE)8 5,8F
No&e5 alliance among the Dordic and -altic exchanges in /enmark$ 8stonia$inland$
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Ma>o& #&end( in in#. e2/i#3 %a&'e#(
Eec#&onic@ ago&i#+%ic and +ig+ $&e2/enc3 #&ading tarting in the mid1930 o!en outcry !its "ere gradually re!laced byco%p/#e&( di(pa3ing and %a#c+ing o&de&($ "ith traders sending their
orders %ia com!uter net"orks from the dealing rooms of in%estments firms Mid1990 "ith nternet and remote access$ the connections bet"een
exchange order matching and dis!lay engines could extend across borders$and in*e(#o&( #+e%(e*e( co/d (end #+ei& o&de&( #o #&ading $i&%( *ia
co%p/#e& ne#)o&'(
2000s an increasing !art of trading is generated by trading firms "riting
and installing ago&i#+%( on com!uters$ "hich generate orders
automatically
Hig+ $&e2/enc3 #&ading 6HFT7 ra!id trading of securities$ carried out bycom!uters to mo%e in and out of !ositions in seconds or fractions of a second
in%estors focused on +T rely on ad%anced com!uter systems$ the !rocessing
s!eed of their trades and their access to the market 25
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Recen# de*eop%en#( in in#e&na#iona e2/i#3 %a&'e#(
T+e *a/e o$ (+a&e #&ading &o(e in 491: 190 )o&d)ide to 2@.' trillion A)/
from the second half of 213 (HB.I yoy
T+e n/%!e& o$ #&ade( &o(e in 491: 190 from the second*half of 213 (H12I
yoy7 the a%erage %alue of trades decreased
5 con#in/ing (#&ong pe&$o&%ance o$ e2/i#3 %a&'e#( global market
ca!italisation rose BI to B$' trillion A)/ from the second*half of 213 (H21Iyoy.
Good pe&$o&%ance o$ IO %a&'e#( and in*e(#%en# $o)( the number of
0=s fell 11I com!ared to the second half of 213 but increased 42I yoy
To#a in*e(#%en# $o)( in USD inc&ea(ed 1?0 com!ared to the second*half of
213(H11I yoy.
E5c+ange T&aded De&i*a#i*e( 6ETD7 *o/%e( )e&e (#a!e the total
number of contracts traded decreased .2I from the second*half of 213 (*13I
yoy.
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Go!a e2/i#3 %a&'e# capi#ai"a#ion
2$
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E2/i#3 %a&'e# capi#ai(a#ion !3 e5c+ange( 6USD !iion7
Source% &orld Federation o' E(c)an*es29
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E2/i#3 a#e&na#i*e( in #+e go!a %a&'e#
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4.. T+e in#e&na#iona de!# %a&'e#
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In#e&na#iona de!# %a&'e#( and in(#&/%en#(
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4.:. T+e $o&eign e5c+ange %a&'e# 6FORE7
=68F !ro%ides#
the !hysical and institutional structure through "hich the money of
one country is exchanged for that of another country7
the determination rate of exchange bet"een currencies
the infrastructure "here foreign exchange transactions are !hysicallycom!leted
Foreign echange means the money of a foreign country7 that is$ foreign
currency bank balances$ banknotes$ checks and drafts.
5 foreign echange transaction is an agreement bet"een a buyer and aseller that a fixed amount of one currency "ill be deli%ered for some other
currency at a s!ecified date.
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O&gani"a#ion o$ FORE
The first global 24*hour market in the "orld and by far the largest T/ maret 2 tiers#
5holesale tier liquid inter*bank market historically$ it accounted for B to 'I of transactions
213# trading bet"een dealers in the interbank market dro!!edto 3@I
there are F6 'roers "ho match buy and sell orders but do not
carry in%entory and F6 s!ecialists (dealers
there are corres!onding banking relationshi!s that facilitate thefunctioning of the market
Retail tier client market 213# increased im!ortance$ mainly due to e*trading
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T+e #&ading da3 in FORE
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FORE &3#+%(
3#
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FORE aicipan#(
-ank and non*bank F dealers maret maers
ndi%iduals and firms conducting commercial and in%estment
transactions
)!eculators and arbitragers
Central banks and treasuries
F brokers
3$
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Ma&'e# aicipan#(= Ban' and Non!an' Fo&eign
E5c+ange Deae&(
-anks and a fe" nonbank foreign exchange dealers o!erate in both the interbank and
client markets.
The !rofit from buying foreign exchange at a 9bid: !rice and reselling it at a slightly
higher 9offer: or 9ask: !rice.
/ealers in the foreign exchange de!artment of large international banks often functionas 9market makers.:
These dealers stand "illing at all times to buy and sell those currencies in "hich they
s!ecialize and thus maintain an 9in%entory: !osition in those currencies.
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Top deae&( FORE
Source% Euromone+ F, Sure+ 2015
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Ma&'e# aicipan#(= Indi*id/a( and Fi&%(
ndi%iduals (such as tourists and firms (such as im!orters$ ex!orters and
,D8s conduct commercial and in%estment transactions in the foreign
exchange market.
Their use of the foreign exchange market is necessary but ne%erthelessincidental to their underlying commercial or in%estment !ur!ose.
)ome of the !artici!ants use the market to 9hedge: foreign exchange risk.
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Ma&'e# aicipan#(= Spec/a#o&( and A&!i#&age&(
)!eculators and arbitragers seek to !rofit from trading in the market itself.
They o!erate in their o"n interest$ "ithout a need or obligation to ser%e
clients or ensure a continuous market. Jhile deae&( (ee' #+e !ida(' (p&ead$ (pec/a#o&( (ee' a #+e p&o$i#
$&o% e5c+ange &a#e c+ange( and a&!i#&age&( #&3 #o p&o$i# $&o%
(i%/#aneo/( e5c+ange &a#e di$$e&ence( in di$$e&en# %a&'e#(.
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Ma&'e# aicipan#(= Cen#&a Ban'( and T&ea(/&ie(
Central banks and treasuries use the market to acquire or s!endtheir country&s foreign exchange reser%es as "ell as to influence the!rice at "hich their o"n currency is traded.
They may act to su!!ort the %alue of their o"n currency because of!olicies ado!ted at the national le%el or because of commitments
entered into through membershi! in oint agreements such as the8uro!ean ,onetary )ystem.
T+e %o#i*e i( no# #o ea&n a p&o$i# a( (/c+@ !/# &a#+e& #oin$/ence #+e $o&eign e5c+ange *a/e o$ #+ei& c/&&enc3 in a%anne& #+a# )i !ene$i# #+e in#e&e(#( o$ #+ei& ci#i"en(.
5s "illing loss takers$ central banks and treasuries differ in moti%efrom all other market !artici!ants.
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La&ge(# cen#&a !an'( $o&eign e5c+ange &e(e&*e(
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Ma&'e# aicipan#(= Fo&eign E5c+ange B&o'e&(
oreign exchange brokers are agents "ho facilitate trading
bet"een dealers "ithout themsel%es becoming !rinci!als in the
transaction.
/ealers use brokers to ex!edite the transaction and to remainanonymous$ since the identity of !artici!ants may influence
short*term quotes.
They do not bear currency risk and are !aid on a commission
basis
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Mo#i*e( $o& F #&an(ac#ion(
Arbitrage is the simultaneous$ or nearly simultaneous$ !urchase ofsecurities in one market for sale in another market "ith the ex!ectation
of a risk*free !rofit
till& there is deli"ery ris
Speculation entails more than the assum!tion of a risky !osition
itim!lies financial transactions undertaken "hen an indi%idual&s
ex!ectations differ from the market&s ex!ectation
Hedging is the a%oidance of foreign exchange risk by entering into a
transaction that lays off the risk to a "illing counter !arty
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Ma&'e#( !3 dei*e&3 da#e
!ot (rate7 t ) 9immediate: (t !ayment and deli%ery of currencies
settlement day # 1 or 2 "orking days
Forward (rate7 F t&T
)
!ayment and deli%ery at some future date (T
common maturities# 3$ @$ 1$ 2'$ and 3B days$ and u! to ten
years
F6 swa! transactions in%ol%e both a s!ot and a for"ard transaction$ or t"o for"ards
transactions of different maturities$ "ith the same counter!arty
4#
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Fo&eign e5c+ange %a&'e# #/&no*e&
Global net turnover (2013) = US$ 5.3 trillion per business dayTurnover = total US dollar value of all spot, outri!t for"ard, and forein e#!ane s"ap transations onluded (not settled) durin t!e %ont! of &pril (averae)
4$Source% ./S - 2013 riennial entral .ank Sure+ o' Forei*n E(c)an*e and Deriaties Market ctiit+
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C/&&enc3 di(#&i!/#ion
49Source% ./S - 2013 riennial entral .ank Sure+ o' Forei*n E(c)an*e and Deriaties Market ctiit+
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T+e geog&ap+3 o$ F #&ading 64917
Source% ./S - 2013 riennial entral .ank Sure+ o' Forei*n E(c)an*e and Deriaties Market ctiit+ 51
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. T+e in#e&na#iona %one#a&3 (3(#e%
Ty!es of exchange rate regimes
The e%olution of exchange rate regimes a brief history
The 8uro!ean ,onetary )ystem
Currency regime in 6omania
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C/&&enc3 #e&%inoog3
8xchange rate K foreign currency exchange rate
8xchange rate regimeKsystem
/e%aluation %ersus de!reciation 6e%aluation %ersus a!!reciation
+ard %ersus soft currencies
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T+e In#e&na#iona Mone#a&3 S3(#e%
The international monetary system (,M) can be defined as thestructure "ithin "hich foreign exchange rates are determined
international trade and ca!ital flo"s take !lace
balance of !ayments adustments are made ,ain com!onents#
a number of !'lic instittions multilateral institutions (,$ Jorld -ank$
etc... and central banks
s!ecific financial marets
foreign exchange markets and eurocurrencymarkets
certain international agreements or 9rules of the game: range from the -retton*Joods 5greement of 1@44 to less encom!assing
9accords: (0laza 1@>$
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Main co%ponen#( o$ IMS
)ince the end of the second "orld "ar$ and the signing of the-retton*Joods 5greement$ all three com!onents of the ,)
ha%e ex!erienced maor changes#
The institutions such as the , and the Jorld -ank ha%e seen theiracti%ities change dramatically
The international financial markets ha%e gro"n tremendously in terms
of %olume and assets traded
The rules of the game ha%e been altered substantially
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E5c+ange &a#e &egi%e(
T)o %ain #3pe(# ree float
ixedK!egged exchange rates
A#e&na#i*e (3(#e%(# ,anagedKdirty float
Target zones
9Cra"ling*!eg:
Do national currency (dollarization
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F&ee Foa#
The %alue of a free floating exchange rate is exclusi%ely established by
demand and su!!ly in the foreign exchange market$ "ith no outside
inter%entions
=%er time$ the echange rate will flctate randomly as market!artici!ants assess and react to ne" information
Central bank (monetary authority does not inter%ene in the !rocess of
currency %alue determination
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Fi5ed8Ra#e S3(#e%
Currencies maintained at a !arity against another crrency or 'aset of
crrencies
Central banks acti%ely buy or sell their currencies in the foreign
exchange market "hene%er the exchange rate de%iates from !ar %alue n order to inter%ene on the =68F$ central bank maintains reser%es$
"hich absorb the burden of exchange rate adustment high "olatility
of reser"es
Currency de%aluation and re%aluation is common
Ty!ically accom!anied by echange control measres
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Managed Foa#
5ssumes central bank inter%ention$ "hich 9mani!ulates: the exchange rategi%en its o'8ecti"es# smoothing out exchange rate fluctuations
9leaning against the "ind:
unofficial !egging of exchange rate /entral 'an s!!ort of the rate is not atomatic
Central bank reser%es fluctuate quite hea%ily$ but ty!ically around a certain
le%el
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Ta&ge# "one(
The exchange rate is maintained "ithin a s!ecific band around a central
%alue (!arity
8xam!les# The %retton5oods ystem# bands of ±1I against the A)/
The *ro!ean Monetary ystem (*M)7 bands of ±2.2>I against 8CA ("ithsubsequent changes for some currencies
The *change Rate Mechanism ,,7 bands of ±1>I against 8uro ("ith some de ure
or de facto exce!tions
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E5a%pe o$ a #a&ge# "one= DEM in #+e B&e##on8
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E5a%pe o$ a #a&ge# "one= FRFDEM in EMS
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E5a%pe o$ a #a&ge# "one= DKKEUR in ERM II
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C&a)ing8peg
The exchange rate fluctuates "ithin a band around a !arity$ but is !eriodically
adusted$ ty!ically de!ending on the inflation differential bet"een the t"o
currencies
Currency mini*de%aluations ha!!en rather frequently$ sometimes e%en daily$
and are announced by the monetary authority /e%aluation&s !ur!ose is to maintain the economy&s com!etiti%eness
Asually im!lemented by emerging markets "ith hy!erinflationary
en%ironments
8xam!le# ,exican !eso$ 1@@*1@@4
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C&a)ing8peg= e5a%pe
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B&ie$ +i(#o&3 o$ IMS
The !resent monetary system has its roots in the gold exchangestandard or -retton*Joods system "hich existed from 1@44*1@'1
-retton*Joods obecti%es#
stable exchange rates a fied echange rate regime
1'and of flctation
elimination of exchange controls
return to free con%ertibility of currencies
Gold and A) dollar ser%ed as international reser%e assets
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B&ie$ +i(#o&3 o$ IMS
/ue to the !ersistence of currency misalignments and massi%ebalance*of*!ayments deficits or sur!luses$ the ,) entered a
!eriod of crises in the years 1@'1*1@'3
)ince early 1@'3$ maor currencies had been !racticing some
form of Lmanaged floatingL$ "hich "as finally recognized in
1@'B "ith im!ortant amendments to the articles of the
nternational ,onetary und
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E/&opean Mone#a&3 S3(#e%
The roots of 8,)# the :snae; *ro!ean /rrency ?nit (*/?)
2> *change Rate Mechanism (*RM)
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E/&opean Mone#a&3 S3(#e%
&s M N@s demise of the 86, Maastricht Treaty K /ecember 1@@1 creation of *ro!ean Monetary ?nion
*M? !rinci!les# system of fied echange rates among the member currencies
common 8uro!ean currency * *ro common central bank * *ro!ean /entral %an
strong coordination of fiscal$ monetary$ and exchange rate !olicies of member countries
8uro "as introduced in 1@@@
Currently$ 1@ 8A countries ado!ted euro as their official currency ( our small states ha%e been gi%en a formal right to use the euro# 5ndorra$ ,onaco$ )an
,arino$ Patican City
T"o non*8A countries use euro unilaterally# ,ontenegro and Qoso%o
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EU i i d d i #+ ERM II
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EU c/&&encie( inc/ded in #+e ERM II
Currency Ooined 86, 6ate andfluctuation band
/e%aluationsK6e%aluations
5do!ted 8uro
/anish kroner 1 Oan 1@@@ '.4B37 R2.2>I * D=
Greekdrahma
1 Oan 1@@@ 3>3.1@7 R1>I 1' Oan 2# re%aluedto 34.'>
E8)7 1 Oan 21
8stonia 2 Oune 24 1>.B4BB7 R1>I * E8)7 1 Oan 211
27 R1>I * E8)7 1 Oan 21>
)lo%enia 2 Oune 24 [email protected] R1>I * E8)7 1 Oan 2'
Cy!rus 2 ,ay 2> .>>2'47 R1>I * E8)7 1 Oan 2
.'247 R1>I (inreality$ R1I
* E8)$ 1 Oan 214
,alta 2 ,ay 2> .42@37 R1>I * E8)7 1 Oan 2
)lo%akia 2 Do%ember2>
3.4>>7 R1>I 1@ ,arch 2'#re%alued to 3>.4424
2@ ,ay 2#re%alued to 3.12B
E8)7 1 Oan 2@
C/&&enc3 &egi%e in Ro%ania
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#6
C/&&enc3 &egi%e in Ro%ania
6egulatory body * @ational %an of Romania
resent regime (1@@' main issues# the inter'an echange rate is freely determined 'y demand
and s!!ly on the FR*6 maret& 't nder a ,5D5G8/
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RONEUR e5c+ange &a#e@ 499;8491;
I $ #i # #i d RONEUR + #
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In$a#ion #a&ge#ing and RONEUR e5c+ange &a#e
nflation targeting frame"ork since 2>⇒ Slite: inflation targeting in
6omania# an eye to"ards the exchange rate Reslts of the inflation targeting monetary rle
5nnual C0 inflation returned inside the %ariation band in
)e!tember 214 (1.>4I
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In$a#ion #a&ge#ing in Ro%ania
Source% .7 /n'lation 7e!ort Fe8ruar+ 2015
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$1
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Con*e&gence c&i#e&ia
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Con*e&gence c&i#e&ia $o& Ro%ania
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Con*e&gence c&i#e&ia $o& Ro%ania