This document provides an overview of international monetary systems, foreign exchange markets, and foreign direct investment. It discusses the evolution of international monetary systems from the classical gold standard between 1816-1914 to the flexible exchange rate regime of today. Key aspects covered include the Bretton Woods system from 1945-1972, which pegged currencies to the US dollar and gold. The document also describes foreign exchange markets and their functions in transferring currencies and providing credit. It defines derivatives and their types. Major stock exchanges like the NYSE and Nasdaq are highlighted. Finally, it defines foreign direct investment and provides an example of FDI in India's retail sector.

1. International Monetary
System
Foreign Exchange Market
Foreign Direct Investment
Presented By:
Nidhi (B&F)
Pawani(G)
Mohit(G)
Prashant(B&F)

2. Meaning
International monetary system refers to the
system and rules that govern the use and
exchange of money around the world and
between countries. Each country has its own
currency as money and the international
monetary system governs the rules for valuing
and exchanging these currencies.

3. Evolution of the International
Monetary System
Classical Gold Standard: 1816-1914
Interwar Period: 1915-1944
Bretton Woods System: 1945-1972
The Flexible Exchange Rate Regime:
1973- Present

4. THE GOLD STANDARD (1816- 1914)
The gold standard involved Buying and selling of
paper currency in exchange for gold on the
request of any individual of firm.
 In this system Gold is freely transferable between
countries.
Participants in this system included UK, France,
Germany & USA
This system created a fixed exchange rate system
because each country defined the value of its
currency in terms of gold

5. The United Kingdom officially set the price of its
currency by agreeing to buy or sell an ounce of
gold for the price of 4.247 pounds sterling. At
that time, the United States agreed to buy or sell
an ounce of gold for $20.67. This enabled the two
currencies to be freely exchanged in terms of an
ounce of gold. In essence,
£4.247 = 1 ounce of gold = $20.67.
The exchange rate between the US dollar and the
British pound was then calculated by
$20.67/£4.247 = $4.867 to £1.

6. ADVANTAGES OF THE GOLD
STANDARD SYSTEM
Highly stable exchange rates under the classical
gold standard provided an environment that was
conducive to international trade and investment.
Misalignment of exchange rates and international
imbalances of payment were automatically
corrected by the price-specie-flow mechanism

7. DIFFICULTIES IN THE SYSTEM
The problem was every country needed to
maintain adequate reserves of gold in order to
back its currency.
Also transacting in gold was expensive, the
costs of loading the gold into the cargo hold of
a ship, guarding it against theft, transporting it,
and insuring it against possible disasters, and
Moreover, because of the slowness of sailing
ships contibuted to the failure of this system.

8. Interwar Period: 1915-1944
 Exchange rates fluctuated as countries widely
used predatory depreciations of their
currencies as a means of gaining advantage in
the world export market.
 Attempts were made to restore the gold
standard, but participants lacked the political
will to follow the rules of the game .
 The result for international trade and
investment was profoundly detrimental.

9. Bretton Woods System:
1945-1972
The purpose was to design a postwar
international monetary system.
The goal was exchange rate stability without the
gold standard.
The result was the creation of the IMF and the
World Bank.
Under the Bretton Woods system, the U.S. dollar
was pegged to gold at $35 per ounce and other
currencies were pegged to the U.S. dollar.
The Bretton Woods system was a dollar-based
gold exchange standard.

10. Bretton Woods System:
1945-1972
German
markBritish
pound
French
franc
U.S. dollar
Gold
Pegged at
$35/oz.
Par
Value

11. Bretton Woods System:
1945-1972
• International Monetary Fund (IMF)
– In July 1944, 44 representing countries met in
Bretton Woods, New Hampshire to set up a
system of fixed exchange rates.
– All currencies had fixed exchange rates against the U.S. dollar
and an unvarying dollar price of gold ($35 an ounce).
– It intended to provide lending to countries with
current account deficits.
– It called for currency convertibility.

12. Goals and Structure of the IMF
The IMF agreement tried to incorporate sufficient
flexibility to allow countries to attain external
balance without sacrificing internal objectives or
fixed exchange rates.
Two major features of the IMF Articles of
Agreement helped promote this flexibility in
external adjustment:
IMF lending facilities
IMF conditionality is the name for the surveillance over the
policies of member counties who are heavy borrowers of Fund
resources.
Adjustable parities

13. Convertibility
Convertible currency
 A currency that may be freely exchanged for foreign
currencies.
Example: The U.S. and Canadian dollars became convertible in
1945. A Canadian resident who acquired U.S. dollars could use
them to make purchases in the U.S. or could sell them to the Bank
of Canada.
The IMF articles called for convertibility on current
account transactions only.

14. Collapse of Bretton Woods
Despite a fixed exchange rate based on the US
dollar and more national flexibility, the Bretton
Woods Agreement ran into challenges in the
early 1970s.
The US trade balance had turned to a deficit as
Americans were importing more than they were
exporting.
Throughout the 1950s and 1960s, countries had
substantially increased their holdings of US
dollars, which was the only currency pegged to
gold.

15. Cont.…
By the late 1960s, many of these countries
expressed concern that the US did not have
enough gold reserves to exchange all of the US
dollars in global circulation.
This became known as the Triffin Paradox

16. The Flexible Exchange Rate Regime:
1973-Present
Flexible exchange rates were declared acceptable
to the IMF members.
Central banks were allowed to intervene in the
exchange rate markets to iron out unwarranted
volatilities.
Gold was abandoned as an international reserve
asset.
Non-oil-exporting countries and less-developed
countries were given greater access to IMF funds.

17. Current Exchange Rate Arrangements
 Free Float
The largest number of countries, about 48, allow market
forces to determine their currency’s value.
 Managed Float
About 25 countries combine government intervention with
market forces to set exchange rates.
 Pegged to another currency
Such as the U.S. dollar or euro.
 No national currency
Some countries do not bother printing their own, they just
use the U.S. dollar. For example, Ecuador, Panama, and El
Salvador have dollarized.

19. Foreign Exchange Market
Foreign exchange is the mechanism by which
the currency of one country gets converted
into the currency of another country.
The conversion of currency is done by the
banks who deal in foreign exchange. These
banks maintain stocks of one currencies in the
form of balances with banks

20. Functions of Foreign Exchange Market
1. Transfer Function:
It transfers purchasing power between the countries
involved in the transaction. This function is performed
through credit instruments like bills of foreign exchange,
bank drafts and telephonic transfers.
2. Credit Function:
It provides credit for foreign trade. Bills of exchange, with
maturity period of three months, are generally used for
international payments. Credit is required for this period
in order to enable the importer to take possession of
goods, sell them and obtain money to pay off the bill.

21. 3. Hedging Function:
When exporters and importers enter into an agreement
to sell and buy goods on some future date at the current
prices and exchange rate, it is called hedging. The
purpose of hedging is to avoid losses that might be
caused due to exchange rate variations in the future.

22. Derivative
What is a 'Derivative‘
 A derivative is a security with a price that is dependent
upon or derived from one or more underlying assets.
 The derivative itself is a contract between two or more
parties based upon the asset or assets.
 Its value is determined by fluctuations in the underlying
asset.
 The most common underlying assets include stocks, bonds,
commodities, currencies, interest rates and market
indexes.

23. Types of Derivatives
• Forward Contracts
• Future Contracts
• Options Contracts
oCall option
oPut option
• Swaps
oInterest rate swaps
oCurrency swaps

24. Major Stock Exchanges
New York Stock Exchange (NYSE) - Headquartered
in New York City
The largest stock exchange in the world by both
market capitalization and trade value.
NYSE is the premier listing venue for the world’s
leading large- and medium-sized companies.
Operated by NYSE Euronext, the holding company
created by the combination of NYSE Group, Inc.
and Euronext N.V.,

25. NASDAQ OMX – Headquartered in New York City.
 Second largest stock exchange in the world by market
capitalization and trade value.
 The exchange is owned by NASDAQ OMX Group which
also owns and operates 24 markets, 3 clearinghouses
and 5 central securities depositories supporting
equities, options, fixed invome, derivatives,
commodities, futures and structured products.
 It is a home to approximately 3,400 listed companies
and its main index is the NASDAQ Composite, which
has been published since its inception.
 Stock market is also followed by S&P 500 index.

26. • Tokyo Stock Exchange - Headquartered in Tokyo
 Third largest stock exchange market in the world by
aggregate market capitalization of its listed companies.
 It had 2,292 companies which are separated into the First
Section for large companies, the Second Section for mid-
sized companies, and the Mothers section for high growth
startup companies.
 The main indices tracking Tokyo Stock Exchange are the
Nikkei 225 index of companies selected by the Nihon Keizai
Shimbun, the TOPIX index based on the share prices of First
Section companies, and the J30 index of large industrial
companies.
 94 domestic and 10 foreign securities companies
participate in TSE trading.

28. Foreign Direct Investment - FDI
 A foreign direct investment (FDI) is an investment
made by a company or entity based in one country,
into a company or entity based in another country.
 Foreign direct investments differ substantially from
indirect investments such as portfolio flows, wherein
overseas institutions invest in equities listed on a
nation's stock exchange.
 Entities making direct investments typically have a
significant degree of influence and control over the
company into which the investment is made.

29. FDI in Retail Sector
 In January 2012, India allowed 100 per cent FDI investment in
single-brand stores, but imposed the requirement that the single
brand retailer would have to source 30 percent of its goods from
India.
 On 7 December 2012, India allowed 51 per cent FDI in multi-brand
retail.
 Indian retail sector accounts for 22 per cent of the gross domestic
product (GDP) and contributes to 8 per cent of the total
employment.
 The list of segments which present themselves for a high growth
opportunity in the Indian retail landscape is endless. Some of these
segments are clothing, textiles, fashion accessories, jewelry,
watches, footwear, health, beauty care, pharmaceuticals, consumer
durables, home appliances, mobiles, furnishings, utensils, furniture,
food, grocery, catering, books, music, gifts and entertainment.

32. FDI in Banking Sector
• Foreign direct investment (FDI) up to 49 percent is permitted in
Indian private sector banks under "automatic route" which includes
Initial Public Issue (IPO), Private Placements, ADR/GDRs; and
Acquisition of shares from existing shareholders.
• Automatic route is not applicable to transfer of existing shares in a
banking company from residents to non-residents. This category of
investors require approval of FIPB, followed by "in principle"
approval by Exchange Control Department (ECD), Reserve Bank of
India (RBI).
• The "fair price" for transfer of existing shares is determined by RBI,
broadly on the basis of Securities Exchange Board of India (SEBI)
guidelines for listed shares and erstwhile CCI guidelines for unlisted
shares. After receipt of "in principle" approval, the resident seller
can receive funds and apply to ECD, RBI, for obtaining final
permission for transfer of shares.

33. Cont…
• Foreign banks having branch-presence in India are eligible for
FDI in private sector banks subject to the overall cap of 49%
with RBI approval.
• Issue of fresh shares under automatic route is not available to
those foreign investors who have a financial or technical
collaboration in the same or allied field. Those who fall under
this category would require Foreign Investment Promotion
Board (FIPB) approval for FDI in the Indian banking sector.
• FDI and Portfolio Investment in nationalised banks are subject
to overall statutory limits of 20 percent.
• The 20 percent ceiling would apply in respect of such
investments in State Bank of India and its associate banks.

35. FDI in Service Sector
 The services sector, which includes banking, insurance,
outsourcing, R&D, courier and technology testing, had
received foreign direct investment (FDI) worth USD
2.22 billion in 2013-14.
 However, the total foreign inflow in 2014-15 in the
services sector was low as compared to 2012-13 when
it was USD 4.83 billion, according to the Department of
Industrial Policy and Promotion (DIPP) data.
 FDI inflows into the services sector grew by over 46 per
cent to USD 3.25 billion in 2014-15.
 Services contribute about 60 per cent to India’s GDP
and it receives high foreign inflows in this sector

36. FDI in Automobile Sector
 Seventh largest producer in the world with an average
annual production of 23.36 Million vehicles.
 Third largest automotive market by volume, by 2016.
 Four large auto manufacturing hubs across the country.
 7.1% of the country’s GDP by volume.
 Six Million-plus vehicles to be sold annually, by 2020.
 100% Foreign Direct investment (FDI) is allowed under
the automatic route in the auto sector, subject to all
the applicable regulations and laws.

37.  Domestic Market Share 2014-15:
1. Passenger Vehicles 13%.
2. Commercial Vehicles 3%.
3. Three-wheelers 3%.
4. Two-wheelers 81%.
 The automotive industry accounts for 45% of the country's manufacturing
gross domestic product (GDP), 7.1% of the country's GDP and employs
about 19 Million people both directly and indirectly.
 India is currently the seventh largest producer in the world with an
average annual production of 23.36 Million vehicles, of which 3.57 Million
are exported.
 The Indian automobile market is estimated to become the third largest in
the world by 2016 and will account for more than 5% of global vehicle
sales.
 India is the second largest two-wheeler manufacturer, the largest
motorcycle manufacturer and the fifth largest commercial vehicle
manufacturer in the world.

38. Important Aspects of FDI in
Automobile Industry
• FDI up to 100 percent, has been permitted under
automatic route to this sector, which has led to a turn
over of USD 12 billion in the Indian auto industry and
USD 3 billion in the auto parts industry
• The manufacturing of automobiles and components
are permitted 100 percent FDI under automatic route
• The automobile industry in India does not belong to
the licensed agreement
• Import of components is allowed without any
restrictions and also encouraged

40. Foreign Investors
Suzuki (Japan)
Nissan (Japan)
Piaggio (Italy)
Volkswagen (Germany)
Renault (France)
Hyundai (South Korea)
General Motors (USA)
BMW (Germany)
Ford (USA)
Toyota (Japan)

41. References
• http://www.makeinindia.com/sector/automobile
s
• http://auto.economictimes.indiatimes.com/news
/industry/fdi-in-automobile-sector-up-89-in-april-
february-fy15/47422304
• business.mapsofindia.com/fdi-
india/sectors/automobile-industry.html
• http://2012books.lardbucket.org/books/challeng
es-and-opportunities-in-international-
business/s10-01-what-is-the-international-
mone.html

42. • http://www.moneycontrol.com/news/cnbc-
tv18-comments/govt-mulls-raising-fdi-
cappublic-banks-to-49-sources_3830541.html
• http://www.ibef.org/industry/india-
automobiles/infographic
• http://www.ibef.org/industry/retail-
india/infographic
• http://www.ibef.org/industry/banking-
india/infographic