1 FRF = 75.90/6.05 = 12.55 INR So the cross rate between FRF/INR is 12.55 INR

1. SRI KRISHNA COLLEGE OF TECHNOLOGY
SCHOOL OF MANAGEMENT
21PNE008 – International Finance
Saravanan R
Assistant Professor
Unit 1
Introduction

3. Topics Covered
1.1 Foreign Exchange–Introduction
1.2 Foreign Exchange–Basics
1.3 Foreign Exchange Market
1.4 Market Participants
1.5 Foreign Exchange Rates
1.6 Factors determining Foreign Exchange Rates
1.7 International Monetary System-Gold Standard-The Bretton woods system.
1.8 Glossary

4. 1.1 Foreign Exchange–Introduction
Video Link
https://tinyurl.com/yajyzbhk

5. History
Barter System-
6000 B.C
Prehistoric currency
involving easily
traded goods like
animal skins, salt
and weapons
developed over the
centuries
770 B.C., the
Chinese used
miniature replicas
of the same tools
cast in bronze
600 B.C. Lydia's King Alyattes
minted the first official currency
and it was stamped with pictures
that acted as denominations.
Civilization, Need and
Wants laid a road map
for Trade / International
Trade

6. Globalization is
not a
phenomena
The Colonial
Expansion led the
way for
International
Trade
In 1870’s the
Industrial Revolution
paved the way for
establishing Global
Market
Second World war
and the Great
Depression in 1930’s
created crises in the
Global Economy
Thus the need for
regularization
aroused which led to
the creation of GATT
and IBRD
History (…Continued)

7. Trade and its type – Goods/Services transferred with Monetary value
Local Trade -
Trade inside
the state
National Trade -
Trade between
states
International Trade -
Trade between
Countries

8. International Financial Management
International
Trade
International
Business
International
Finance
Finance
Decisions

9. International Financial Management – What?
IFM may be defined as
the management of the
whole gamut of finance
operations relating to
international activities of
business organization
Management of financial
resources in the context
of international economic
activities is referred to as
IFM

10. International Financial Environment in
India - Timeline
Pre
Colonial
Q1 Q Q3 Q4
Manufacturing
Hub
01
Colonial
Q1 Q2 Q3 Q4
Raw Material
Export
02
Post
Independence
Q1 Q2 Q3 Q4
Deficit Balance of
Trade and
Payments for 40
Years
03
Post 1991 -
1992
Q1 Q2 Q3 Q4
LPG
05
Forex Reserves - $5.8
billion as of March
1991

11. Why India went for LPG?
Foreign exchange reserves
were almost Nil during
1990-1991.
Foreign reserves are a
base for a country to print
its currency
India forced itself to join the
forum of world trade to
counter the imbalance in
foreign reserves.
As a result India went for LPG
in 1991-92 under the Congress
Government led by Late Prime
Minister Narashima Rao and
then Finance Minister
Dr Manmohan Singh.

12. International Financial – Openness
Trade to GDP
Ratio = (Import +
Export) / GDP
As per 2021 data
released by WTO,
the Trade to GDP
Ratio of India is
43.68% and
stands below in
the table
compared to other
countries
In India post
1991 –
Openness was
15% to
liberalization i.e
Trade to GDP
Ratio was 15%

13. Trade to GDP Ratio – Ranking- Top 5 and Bottom 5
https://data.worldbank.org/indicator/NE.TRD.
GNFS.ZS?most_recent_value_desc=true
Top 5
Country Most
Recent
Year
Most
Recent
Value
Hong Kong 2021 403
Luxembourg 2021 389
Singapore 2021 338
San Marino 2021 305
Malta 2021 283
Bottom 5
Country Most
Recent
Year
Most
Recent
Value
Afghanistan 2021 25
Ethiopia 2021 24
United States 2021 23
Cuba 2021 16
Sudan 2021 4

14. Trade to GDP Ratio – World – Source:
World Bank Data

15. Trade to GDP Ratio – India – Source:
World Bank Data
•

16. International Financial Management –
Why?
Money and Risk travel
parallelly
Money flow inward
and outward
simultaneously
Decision in terms of
Finance and business
has to be taken at
every incidence
Movement of Money is
complex
How to reduce risk?
How to maximize
profit?
How to maximize
wealth?

17. 1.1 Foreign Exchange–Introduction
•Identify the goods (sector wise) that are exported from
India and Imported to India in large quantity for the past
three years.
•Analyse the impact of Foreign Trade in India’s Economy-
sector wise
•Do you think Liberalization has given a boost to India’s
Trade?-substantiate with data

18. 1.2 Foreign Exchange–Basics
Video Link
https://tinyurl.com/y8plhkv6

19. • Foreign Exchange means Foreign Currency held by the host
country
• FX is used to make payments at the time of international trade.
• FX acts as a base for our country to print Indian Rupees.
Foreign Exchange–Basics (FX)

20. Foreign Exchange Reserves of India
Source:https://m.rbi.org.in/Scripts/WSSViewDetail.aspx?TYPE=Section&PARAM1=2
Foreign Exchange–Basics (FX)
Item
As on Sep, 2022
₹ Cr. US$ Mn.
1 2
1 Total Reserves 4351017 545652
1.1 Foreign Currency Assets 3866549 484901
1.2 Gold 304491 38186
1.3 SDRs 141030 17686

21. 1.2 Foreign Exchange–Basics
• From Newspaper articles take snapshots of data of
news articles in terms of Forex and make a
presentation on it and upload in google classroom.
• Using Tableau, represent the Forex reserves that Post
Independence, Post LPG, Post 2008, Post GST.

22. 1.3 Foreign Exchange Market
Video Link
https://tinyurl.com/ybrcdmfs
https://tinyurl.com/y8xnjylo

23. Foreign Exchange Market

24. Foreign Exchange Market
The FX market is a
market in which
foreign exchange
transactions take
place.
A FX market refers to
buying foreign currencies
with domestic currencies
and selling foreign
currencies for domestic
currencies.
"A Foreign Exchange Market
comprises of all those
institutions and individuals
who buy and sell foreign
exchange which may be
defined as foreign money or
any liquid claim on foreign
money“ - Ellsworth

25. Foreign Exchange Market –
Characteristics/Nature
Decentralized
market
Transactions
take place
through
electronic media
It is a 24 hours market, 5
Days a week-
Sunday 22:05 GMT to
Friday 21:50 GMT
It’s a 365 days
year market
Largest liquid
financial
market
Currencies are
always traded
in pairs.
Trading can be
done at a
convenience
time
Exchange Rates are quoted in
Pair Currencies – Euro/USD,
USD/Yen, USD/INR (selling
rate/buying rate)

26. Foreign Exchange Market – Trading
Session
The 24-hour forex trading session can be broken
down into three manageable trading periods.
Peak activity periods are the Asian, European, and
North American sessions, which are also called
Tokyo, London and New York.
The markets are most active when these three
powerhouses are conducting business.
A Day opens at Sydney (2200 GMT) and Tokyo
(0000 GMT) and the day closes at New York (2200
GMT)

27. Foreign Exchange Market – Trading
Session

28. Foreign Exchange Market –Statistics
https://www.bis.org/statistics/rpfx19_fx.pdf#page=7

29. Foreign Exchange Market –Statistics
Source:
https://asianbankingandfinance.net/foreign-exchange/more-news/global-fx-market-
daily-turnover-hits-66t-in-2020
4
5.1
6.6
0
1
2
3
4
5
6
7
FX Daily Turnover – in Trillion $
2010 2016 2020

30. 1.3 Foreign Exchange Market
• Analyse the recent trends in Trade for the previous
Financial Year by taking the data of
• Top economies
• Developing economies
• Underdeveloped economies

31. 1.4 Foreign Exchange Market-Market
Participants
Video Link
https://tinyurl.com/y9jx2hvz
https://tinyurl.com/yaz475nt

32. Foreign Exchange Market Participants
Interbank /
Wholesale
Foreign
Exchange Market
Retail Foreign
Exchange Market
• Foreign Exchange Dealers
• Foreign Exchange Brokers
• Hedgers
• Speculators
• Arbitragers
• Central Banks
• Treasuries
• Individuals
• Small companies
• Small exporters and importers
• Money transfer
companies/remittance
companies

33. 1.5 Foreign Exchange Rates
Video Link
https://tinyurl.com/y8p47rk5
Worked Out Problems Link
https://tinyurl.com/y87tj7m4

34. Foreign Exchange Rates
A Rate at which a
currency is
exchanged with
other currency
A Rate at which a
currency is
expressed in terms
of other currency
A rate at which a
currency can be
bought or sold
1 USD = INR 75.88 1 EUR = INR 82.09

35. Foreign Exchange Rates
USD/INR –
Base/Quote,
INR/USD –
Base/Quote
Base Currency
is quoted first
Base Currency
value is always
equal to 1
USD/INR = 75.88
Inference: If
you buy 1 USD
you have to
pay 75.88 INR
(or) if you sell 1
USD you will
get 75.88 INR
EUR/USD = 1.18
Inference: If
you buy 1 EUR
it will costs
1.18 USD
(or) if you sell 1
EUR you will
get 1.18 USD

36. Foreign Exchange Rates – Significance of decimal
points
Forex quotation
in interbank
market is
normally
expressed up to
4 points after
decimal while
for retail
quotations it is
given up to 2
points after
decimal.
This is done
because size
for each trade
in interbank
market is big,
even a 1 point
difference in the
4th point after
decimal makes
a substantial
difference.
For example, let
us compare two
quotations:
USD/INR
45.7097 and
USD/INR 45.70.
Suppose a
trader wants to
sell 70,000
USD and
receive INR.
Using the first quote,
the trader would
receive INR
3,199,679
Using the second
quote, the trader
would receive INR
3,199,000
a difference of
INR 679.

37. Foreign Exchange Rates
Foreign exchange rates are quoted as
Inter bank
Quotations –
European
Terms,
American
Terms
Direct and
Indirect
Quotations
Bid and Ask
Quotations
Quote =
Price of a
currency
expressed
in the
units of
another
currency.

38. Foreign Exchange Rates - Inter bank
Quotations
• European Terms - the number of units of foreign currency needed to
purchase 1 USD (Exchange rate is quoted in terms of Home Currency)
CAD 1.41 / 1 USD (1 USD = 1.41 CAD)
Brazilian Real 5.86 / 1 USD (1 USD = 5.86 BR)
INR 75.88 / 1 USD (1 USD = 75.88 INR)
• American terms – the number of units of USD needed to purchase one
unit of foreign currency (Exchange rate is quoted in terms of USD)
USD 0.71 / 1 CAD (1 CAD= 0.71 USD)
USD 0.71 / 1 Brazilian Real (1 BR= 0.71 USD)
USD 0.013 / 1 INR (1 INR= 0.013 USD)

39. Foreign Exchange Rates - Direct and Indirect
Quotation
• Direct Quote - A direct quote is a home currency price of One Unit of
foreign currency. (Exchange Rate is quoted in Home Currency) (Value
of the domestic currency varies and value of the foreign currency
remains fixed)
• In India, we follow Direct quote since 1994.
• INR 75.88 / 1 USD – Indian Resident (1 USD = 75.88 INR)
• USD0.020673 / 1 INR – USA Resident (1 INR= 0.020673USD)
• INR 82.09 / 1 EUR – Indian Resident (1 EUR= 82.09 INR)
• EUR 0.012 / 1 INR – UK Resident (1 INR= 0.012 EUR)

40. Foreign Exchange Rates - Direct and
Indirect Quotation
Indirect Quote - An indirect quote is a foreign currency price of One
unit of home currency.
(Exchange Rate is quoted in Foreign Currency)
(Value of the domestic currency remains fixed and value of the foreign
currency varies)
•USD 0.01317 / 1 INR – Indian Resident (1 INR= 0.020673USD)
• EUR 0.012 / 1 INR – Indian Resident (1 INR= 0.012 EUR)
• INR 75.88 / 1 USD – USA Resident (1 USD = 75.88 INR)
• INR 82.09 / 1 EUR – UK Resident (1 EUR= 82.09 INR)

41. Foreign Exchange Rates - Bid and Ask Quotations
• All forex quotations are expressed in term of bid and ask rates.
• Bid - A bid is the exchange rate of one currency at which a dealer will
buy another currency.
• Ask (Offer) – An ask is the exchange rate of one currency at which a
dealer will sell the other currency.
• Bid and Ask is always seller’s point of view
Bid = Buy
Ask = Sell

42. Foreign Exchange Rates - Bid and Ask Quotations
• Suppose SBI, a dealer in forex, is quoting bid-ask
EUR/INR of 76.5025 to 76.5048 or 76.5025/76.5048 or 76.5025/48
(or BID/ASK or BUY/SELL)
Inference:
• Bid Rate - SBI is willing to buy 1 Euro from the counterparty and pay
INR 76.5025
• Ask Rate - SBI is willing to sell (or give) 1 Euro to counterparty and
accept (or receive) INR 76.5048.
• Ask - Bid = Spread. Spread = Profit/Loss
𝑆𝑝𝑟𝑒𝑎𝑑 =
𝐴𝑠𝑘 − 𝐵𝑖𝑑
𝐵𝑖𝑑
∗ 100

43. Foreign Exchange Rates - Bid and Ask Quotations
(Calculations showing Spread)
Interbank Forex Quotations
Bid (Buy) Ask (Sell) Bid-ask = Spread
GBP/USD 1.62536 1.62576 USD 0.00040/GBP
GBP/AUD 1.7703 1.7714 AUD 0.0011/GBP
JPY/USD 0.01136 0.0114 USD 0.0016/JPY
NZD/USD 0.73665 0.73705 USD 0.0040/NZD

44. Foreign Exchange Rates - Bid and Ask
Quotations
1 USD= 75 INR
INR in terms of USD?
1 INR = 1/75 USD
Interbank Forex Quotations
Bid (Buy) Ask (Sell)
GBP/USD 1.62536 1.62576
USD/GBP 1/ASK 1/BID

45. Foreign Exchange Rates – Cross Exchange Rate
• A cross rate is a rate which exchange rate can be calculated from two
other rates. For calculation of cross rates, both rates must have one
common currency.
• What would be the exchange rates between FRF/INR?
• When the direct quote is not available for FRF/INR we need to use
Cross Exchange rate to find the exchange rate.

46. Foreign Exchange Rates – Cross Exchange Rate
Assume:
• In Mumbai – 1 USD= 75.88/75.90 INR
• In London – 1 USD= 6.05/6.08 FRF
Procedure:
Step 1: We need to sell INR and get USD from Mumbai (75.90 INR)
Step 2: Sell USD and get FRF from London (6.05 FRF)

47. Foreign Exchange Rates – Cross
Exchange Rate
• A. 1 USD = 75.90 INR
• B. I USD = 6.05 FRF
• C. 1 USD = 6.05 FRF = 75.90 INR
• D. i.e 6.05 FRF = 75.90 INR
• 1 FRF = (75.90/6.05) INR
• Integrating Mumbai and London
1 USD = 75.90 INR =
• Therefore to calculate Direct Quote FRF/INR,
6.05 FRF = 75.90 INR (or)
1 FRF = (75.90/6.05)INR
1 FRF= 12.5454 INR
i.e. FRF/INR= 12.5454

48. Foreign Exchange Rates – Cross Exchange
Rate
• If the exchange rate in Mumbai is 1 USD= Rs.55.2050/2100 and in
London the exchange rate is 1 USD = 0.7846/0.7849 EUR, what is the
exchange rate between EUR/INR?
• Mumbai – 1 USD= 55.2100 INR, London – 1 USD=0.7846 EUR
• Therefore, 1 USD = 55.2100 INR = 0.7846 EUR
07846 EUR= 55.2100 INR
1 EUR = (55.2100/0.07846)INR
1 EUR = 70.3670 INR

49. If the exchange rate in Mumbai is 1 USD= Rs.55.2050/2100 and in London the
exchange rate is 1 EUR = 1.2740/2745 USD, what is the exchange rate between
EUR/INR?

50. Foreign Exchange Rates – Cross Exchange Rate
• If the exchange rate in Mumbai is 1 USD= Rs.55.2050/2100 and in
London the exchange rate is 1 EUR = 1.2740/2745 USD, what is the
exchange rate between EUR/INR?
• Mumbai – 1 USD= 55.2100 INR, London – 1 EUR=1.2740 USD
• Therefore, 1 EUR = 1.2740 USD and 1 USD = 55.2100 INR
1 EUR = USD * INR , i.e. 1 EUR = 1.2740 USD * 55.2100 INR
1 EUR= 70.33754 INR

51. Foreign Exchange Rates – Cross
Exchange Rate
Spot Rates and Cross Rate Calculation
USD/CAD USD/AUD CAD/AUD &
AUD/CAD
Bid Ask Bid Ask Bid Ask
1.1641 1.1646 1.2948 1.2956 ? ?
Dealer Buy Sell
Trader Sell Buy

52. Foreign Exchange Rates – Types of Contracts
Types of
Contracts
Spot
Contract /
Cash
Transaction
Forward
Contract
Futures
Contract Swap
Contract
Options
Contract

53. Foreign Exchange Rates – Spot Contract
When a person goes to money changer/bank and buys one currency by paying
another currency is an example of spot transaction (or spot delivery) and the
rate quoted by the money changer/bank is the spot rate.
For example, in India, some hotels buy or sell foreign currency over the
counter.
In the above example, the trade date and settlement date coincide.
Actual settlement for the agreed amount may take place on T+1 or latest by
T+2 days in case of when interbank market, banks and financial institutions
buy and sell currencies

54. Foreign Exchange Rates – Spot Contract
execution in India
• The trade date is the day on which both parties agree to buy and sell.
• The settlement date is the day on which funds are actually transferred
between the buyer and seller.
Different types of delivery/settlement under spot transaction.
Ready or
cash
The transaction to be settled on the same day
Tom
T+1
The delivery of foreign exchange to be made on the day
next (tomorrow) to the date of transaction.
Spot
T+2
Delivery of foreign exchange would take place on the 2nd
working day from the trade date.

55. Foreign Exchange Rates – Forward Contract
Forward
Contract
In a forward contract
both parties enter
into a contract on a
given day and lock in
a fixed rate on
specific future date.
In such types of contract,
the terms of the trade
(buy or sell) are agreed
up front (trade execution
date) but actual
exchange take place on
a date in the future
(maturity date).
On the maturity
date, both parties
exchange the pre-
negotiated rate.
There is no standard
clause regarding the
duration of the forward
contract. As these are
OTC contracts, as
long as both parties
agree, forward
contract maturity can
be of any duration.
Forward contracts
can be closed early,
extended or cancelled
altogether. But it
comes with some
cost.

56. Foreign Exchange Rates – Forward Contract
• For example, an Indian company which is likely to earn foreign currency Euro on
account of an export order after one month, may enter into a contract today
(trade execution date) to sell Euro and receive Indian Rupees after 1 month
(maturity date). The rate is fixed on the trade date and the rate is be known as
Fwd- 1 month rate.
• Suppose on trade date, the Indian exporter agrees to sell EURO 1000 and
receive INR 72450. On the maturity date, he delivers EURO 1000 and receives
INR 72450. Such types of forward contracts are known as outright forward
contracts (OFTs).

57. Foreign Exchange Rates – Forward Contract
Fixed Maturity
Contract
the
maturity
date is
fixed
Partially
Optional
Contracts -
settlement of the
transaction can
happen at any
time during the
option start date
and on before
maturity
Fully Optional
Contract
the contract may
end anytime
during the life of
the contract i.e.
anytime during
trade execution
date and
maturity date

58. Foreign Exchange Rates – Forward Contract
• In a forward contract, the bank/forex dealer and counterparty agree to
buy/sell foreign currency at a future date at rate fixed today.
• In forward contract, both parties agrees on a forward trade at day 0,
but actual settlement happens after the maturity of the contract.
Outright
USDINR Bid Rate Ask Rate
Spot 47.0725 47.0745
1 week 47.0750 47.0775
2 weeks 47.0795 47.0835
1 month 47.0840 47.0890
Point System
USD/INR Bid in
points
Ask in
points
Spot 47.0725 47.0745
1 week 25 30
2 weeks 70 90
1 month 115 145

59. Foreign Exchange Rates – How to Calculate
Forward Contract ?
The Thumb Rule to calculate Forward Contract Price is High-Low Thumb Rule or Low-
High Thumb Rule
If Bid in points > Ask in points Points are subtracted from the spot
If Bid in points < ask in points Points are added to the spot
Quotes given by Forex dealer
USD/INR BID ASK
Spot 47.0725 47.0745
1 Week 35 30
2 Weeks 40 33
1 month 60 45
2 months 75 55
Forward Rates Calculated
USD/INR BID ASK
Spot 47.0725 47.0745
1 Week 47.0690 47.0715
2 Weeks 47.0685 47.0712
1 month 47.0665 47.0700
2 months 47.065 47.0690
Rule
Bid > Ask
Bid > Ask
Bid > Ask
Bid > Ask

60. Premium/Discount Annualised Percentage =
FR−SR
SR
∗ 𝑛 ∗ 100
When FR>SR = Forward Premium
When FR<SR = Forward Discount
FR = Forward Rate, SR = Spot Rate,
n= No. of converts
If 90 days is given in sum, then 90*4=360 , Therefore n= 4
If 180 days is given in sum, then 180*2=360, Therefore n=2
If 30 days is given in sum, then 30*12=360, Therefore n=12
If 6 months is given in sum, then 6*2=12 months, Therefore n=2
If 3 months is given in sum, then 3*4=12 months, Therefore n=4
Forward Premium/Discount

61. Sum 1: Assume the following quoted are given for 90 days contract.
Calculate Premium/Discount Annualised Percentage if
FR=$0.8500/Pounds, SR=$0.8576/Pound.
Since FR<SR, we need to calculated Forward Discount, n=4
Forward Discount Annualised Percentage =
FR−SR
SR
∗ 𝑛 ∗ 100
=
0.8500−0.8576
0.8576
∗ 4 ∗ 100 = 3.54% p.a
Forward Premium/Discount

62. Sum 2: The Danish Kroner(DKr) is quoted in New York at
$0.18536/DKr Spot, $0.18525/DKr 30 days forward, $0.18510/DKr 90
days forward, $0.18485/DKr 180 days forward. Calculate the forward
premium/discount on the Kroner
Forward Premium/Discount

63. Foreign Exchange Rates – Futures contract
An exchange traded
forward contract is known
as futures contract.
Futures contracts are
standardized – contract
size, maturity period.
The clearing house associated with
exchange takes the counterparty
risk – risk that the loss making party
does not deliver during the maturity
period.
In India, forex futures contracts on
INR/US$, INR/Euro, INR/Pound Sterling
and INR/Japanese Yen are traded at
some Indian exchanges like National
Stock Exchange and United Stock
Exchange.
Futures

64. Foreign Exchange Rates – Swap Contract
US Company
(invest in India)
Borrow
Borrow from US Bank =
6% Interest
Borrow from Indian Bank
= 9 % Interest
Indian
Company
(Invest in USA)
Borrow
Borrow from Indian
Bank = 6% Interest
Borrow from USA
Bank = 9 % Interest

65. Foreign Exchange Rates – Swap Contract
US Company Borrow
Borrow from
US Bank = 6%
Interest
Indian
Company
Borrow
Borrow from
Indian Bank =
6% Interest
SWAP

66. Foreign Exchange Rates – Swap Contract
US Company Return
Swapped
Indian Money
Indian
Company
Return
Swapped US
Money

67. Foreign Exchange Rates – Options Contract
• Option = Right but not obligation
• 1 USD= INR 50
• Call Option = Right to buy and not the obligation to buy
• Spot exchange rate is higher than the strike exchange rate
• Put Option = Right to sell and not the obligation to sell
• Spot exchange rate is lesser than the strike exchange rate

68. 1.5 Foreign Exchange Rates
• Find out the Bid rate and offer rates for the following 5
currencies in correspondence with INR as on the date
– USD/INR, GBP/INR, EUR/INR, CHY/INR, JPY/INR.
• Calculate cross rates for the following.
Currency Pair 1 Currency Pair 2 Cross Rates
USD/INR GBP/USD GBP/INR
GBP/INR EUR/GBP EUR/INR
EUR/INR CHY/EUR CHY/INR
CHY/INR JPY/CHY JPY/INR
JPY/INR USD/JPY USD/INR

69. 1.6 Factors determining Foreign
Exchange Rates
Video Link
https://tinyurl.com/y7ozq5pn

70. Factors Determination of exchange rates
Balance of
Payments
Fiscal Policy Interest Rate
Central Bank
Intervention
Speculation
Expectations
and traders
behaviour
Demand for Foreign Exchange
• Import of Goods/Services
• Dividend, Interest and Profits
• Unilateral Payments
• Export of Capital
Supply of Foreign Exchange
• Exports of Goods/Services
• Dividend, Interest and profits
• Unilateral Receipts
• Import of Capital

71. 1.6 Factors determining Foreign
Exchange Rates
• Consider the following data 1 USD = 75.18 INR, 1
Pound = 94.32 INR, 1 Yuan = 10.58 INR, 1 Euro =
83.97 INR. Analyze why Indian Currency is of lesser
value when compared to Dollars, Pound Sterling,
Yuan, Euro ?
• Draw a bar chart of Indian Currency Exchange Rate
in comparison with the above mentioned currencies
for the last 5 years by taking the average data.

72. 1.7 International Monetary System,
Gold Standard, The Bretton Woods
System
Video Link
https://tinyurl.com/y7lwxtep

73. • The Set of rules, conventions and institutions that governs the
international trade, business, investment are referred to as IMS.
• IMS facilitated the transactions between the countries in relation to
trade and business.
• IMS provides a framework through which forex rate is determined.
International Monetary System(IMS)

74. • Gold Standard (1870’s-Pegged Exchange Rate System)
• Bretton Woods System (1944-Fixed Exchange Rate System)
• Flexible Exchange Rate System (1973)
Evolution of IMS

75. International Monetary System – Gold
Standard-
The gold
standard is a
system in which
international
currencies are
tied to a specific
amount of gold.
Currency
Value =
Weight of
the Gold
No
restrictions
in the flow of
Gold
between
countries
Gold Reserves
used to back
up the Value of
the currency.
All payments
were settled
through gold
majorly.
If a country
imports more
than export gold
flowed out and
vice versa

76. 1. US = $ 20.67/1 Ounce of Gold
2. Britain= GBP 4.7247/1 Ounce of Gold
3 .Therefore 1 Ounce of Gold = $20.67 = GBP 4.7247
i.e $20.67 = GBP 4.7247
1$ = GBP4.7247/20.67, 1$=GBP 0.2296
1 GBP = $20.67/4.7247, 1 GBP = $ 4.86656
• Gold standard facilitates the imbalance in the BoP i.e.,
Export<Imports, Imports<Exports
Gold Standard

77. • E.g- If Germany as a Trade Deficit i.e. Export<Imports
• Gold flowed out of Germany for settlement of Trade
• When ever gold flows out, availability of gold reduces thus shrinks the
money supply of Germany
• When money supply reduces, prices of the product comes down
making the products to be affordable and competitive
• Thus when export increases the deficit is wiped out i.e Export =
Import.
Gold Standard

78. Suspension of Gold Standard
With the outbreak of the First World War in 1914, the international
trading system broke down and nations valued their currencies by
fiat instead
Governments took their currencies off the gold standard and simply
dictated the value of their money and printed currencies without backup
Countries restricted the free flow of Gold
Some nations attempted to reinstate the gold standard at pre-war rates,
but drastic changes in the global economy made such attempts futile.

79. Suspension of Gold Standard
US became the first nation to re-adopt gold standard in1919 and
Britain in 1925.
In 1930’s Great Depression made Britain's Gold reserve to deplete and
it was impossible for them to maintain gold standard.
In 1931, British suspended Gold convertibility and let the Pound to
float
US was the only country with more gold reserves and it also got
depleted and US abandoned Gold Standard in April 1933.

80. International Monetary System – Bretton Woods
Agreement and System
The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44
countries at the United Nations Monetary and Financial Conference held in
Bretton Woods, New Hampshire. Thus, the name “Bretton Woods Agreement.
The principal goal was to create an efficient foreign exchange system
The Bretton Woods Agreement also created two important organizations—the
International Monetary Fund (IMF) and the World Bank.
The Bretton Woods System required a currency peg to the U.S. dollar which was
in turn pegged to the price of gold.($35)

81. Bretton Woods Agreement
Each country agreed to fix up
their par value of its currency
to USD. This par value
determined the exchange
rate.
US and UK
wanted to
revamp the
world monetary
system
USD was the main
reserve held by Central
Banks and the only
currency that was
directly converted into
gold was USD

82. International Monetary System – Bretton Woods
Agreement and System
United States of America, at that time, was accounted for over half of
the world's manufacturing capacity and held most of the world's gold,
the leaders decided to tie world currencies to the US dollar, which, in
turn, they agreed should be convertible into gold at $35 per ounce.
Under the Bretton Woods system, Central Banks of participating
countries were given the task of maintaining fixed exchange rates
between their currencies and the US-dollar.
The threshold limit was fixed to +/- 1%

83. International Monetary System – Bretton Woods
Agreement and System
Suppose assume the fixed exchange rate of
INR in terms of USD is Rs 10 (this is arrived
based on $35/ounce)
If this rate reduces it can go up to Rs 9 or if it
raises it can go up to Rs 11
In case if it goes beyond Rs 11 then the
member country has to bring that price in
control by providing with dollars
In case if it falls below Rs 9 then the member
country has to control by purchasing dollars

84. International Monetary System – Bretton Woods
Agreement and System
The par value was allowed to be changed when
there was a deficit in the trade
For a change of 10% IMF approval was not
required
For a change of more than 10% IMF approval
was required.

85. Collapse of Bretton Woods
In 1960’s
various
expansion
programme
was taken by
US and it had
to face a trade
deficit
because of
the
expansion.
Member
countries lost
confidence on
USD and
started to
convert USD
into Gold
As a result
Gold reserves
in US treasury
began to fall
and in August
1971, US
suspended
convertibility
of USD to
Gold.
In Dec
1971,
Smithsonian
Agreement
fixed up at
$38 per
ounce with
+/- 2.5%

86. Collapse of Bretton Woods
In February
1973, $42 per
ounce with +/-
2.5%
By March,
1973 the
Bretton
Woods
System had
collapsed.
Countries
were then free
to choose any
exchange
arrangement
for their
currency,
except
pegging its
value to the
price of gold.
Then paper
currencies
standard which is
neither linked to
gold or US-dollar
or any other
foreign currencies
and they have
adopted the
currency system
which is “flexible
exchange rate
system in 1976.

87. 1.7 International Monetary System,
Gold Standard, The Bretton Woods
System
• Analyse the impact of Bretton woods system referring to
research papers using EBSCO and submit the analysis in
google classroom

88. Forex Simulation

89. CROSSWORD

90. MCQ Link
• https://quizizz.com/join?gc=8595131