History of international financial markets


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History of international financial markets

  1. 1. Submitted By:- Karun Mahajan 05-MBA-IB-12 History Of International Financial Market
  2. 2. What are International Financial Market ? • The International Financial Markets are the financial markets where indiviuals buy and sell foreign assets such as :- Stock Bonds Currencies, etc. • International Financial Market is also a place where various institutions lay down rules for international transactions (exchange of money).
  3. 3. History of International Financial Market  Historical overview of International Financial Market regime are broadly divided in to following heads:-  Classical Gold Standard ( Pre – 1914)  Bretton Woods System (1944 – 1973)  Floating Exchange Rates System (1973 onwards)
  4. 4. Gold Standard System (Pre-1914)  Gold has been a medium of exchange since 3,000 BC.  Each Currency was convertible in to gold at a specified rate, as dictated by the Gold Standard.  Currency exchange rates were in effect fixed.  Was in effect until the outbreak of World War 1, as the free movement of gold interrupted.
  5. 5. Example  US Dollar($) is pegged to gold at $20.67 per oz.  British Pound(£) is pegged to gold at £4.25 per oz.  Therefore, the exchange rate is determined by the relative gold prices :  $20.67 = £ 4.25 Then £1 = $4.87
  6. 6. The Inter War Years & WW • During this period, currencies were allowed to fluctuate over a fairly wide range in terms of gold and each other. • Increasing fluctuations in currency values became realized as speculators sold short weak currencies. • The US adopted a modified gold standard in 1934. • During WWII and its chaotic aftermath the US dollar was the only major trading currency that continued to be convertible.
  7. 7. Bretton Woods Agreement (1944)  As WWII drew to a close, the Allied Powers met at Bretton Woods, New Hampshire to create a post-war international monetary system.  The 1944 Bretton Woods Agreement called for fixed currency exchange rates.  The Bretton Woods Agreement established a US dollar based international monetary system and created two new institutions the International Monetary Fund (IMF) and the World Bank.
  8. 8. Smithsonian Agreement  By 1971, the U.S. dollar appeared to be overvalued. The Smithsonian Agreement devalued the U.S. dollar and widened the boundaries for exchange rate fluctuations from ±1% to ±2%.  Even then, governments still had difficulties maintaining exchange rates within the stated boundaries. In 1973, the official boundaries for the more widely traded currencies were eliminated and the floating exchange rate system came into
  9. 9. Floating Rate System (1973 onwards)  A floating exchange rate system is a type of exchange rate regime in which a currency’s value is determined according its demand and supply.  In other words, it is a system in which currency’s value is allowed to fluctuate according to foreign exchange market.  In modern world most of the world currencies are floating.