Exchange Rate
Mechanism
for
International Trade
Management
Learning Objectives
1. What is Exchange Rate?
2. What are the Exchange Rate
Mechanisms?
3. How Exchange Rate impacts
International Trade and its
Management?
4. Understanding Exchange Rate & FX
Rate Sheet of UCB.
What is Exchange Rate ?
An exchange rate is the rate at which one
currency will be exchanged for another.
It is also regarded as the value of one
country's currency in relation to another
currency.
For example, an Exchange Rate of
1USD=114 JPY means Japanese Yen (JPY)
114 to be exchanged for each of the United
States Dollar (USD).
History of Exchange Rates
Bimetallism before 1875
Both gold and silver were used as money.
Some countries were on Gold Standard, some on Silver Standard, some on both.
Both gold and silver were used as international means of payment and the exchange
rates among currencies were determined by either their gold or silver content.
Classical Gold Standard: 1875-1914
Gold alone was assured of unrestricted coinage. There was two-way convertibility
between gold and national currencies at a stable ratio. The exchange rate between
two country’s currencies would be determined by their relative gold contents.
Example : Dollar pegged to gold at U.S.$30 = 1 ounce of gold British pound pegged
to gold at £6 1 ounce of gold Exchange rate determined as: £6 = 1 ounce of gold =
$30 £1 = $5
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.
History of Exchange Rates
Bretton Woods System: 1944-1975
In July 1944, representatives of 44 nations gathered at Bretton Woods, New
Hampshire. To discuss and design post war international monetary system. At the
conference two organizations established.
•The International Monetary Fund (IMF)
•The International Bank for Reconstruction and Development- the World Bank
Under the Bretton Wood system each country established a par value in relation to
the U.S dollar, which was pegged to gold at $35 per ounce.
Each country was responsible for maintaining its exchange rate within 1 percent of
the adopted par value by buying or selling foreign exchange as necessary .
By 1973 the Bretton Wood Agreement had broken down and since then exchange
rates have been allowed to float. Some rates float freely, while others are
constrained with in certain band
History of Exchange Rates
After the Bretton Woods system broke down, the world
finally adopted the use of Floating Foreign Exchange
Rates during the Jamaica agreement of 1976.
Commonly referred to as the Jamaica Accords.
This meant that the use of the gold standard would be
permanently abandoned.
Most governments today use one of the following three
exchange rate systems:
1. Dollarization (El Salvador, Panama, Zimbabwe...)
2. Pegged Rate
3. Managed Floating Rate
Exchange Rate Mechanism
Exchange Rate Mechanisms (ERM), are systems
designed to control a currency's exchange rate relative
to other currencies.
1. At their extremes, Floating ERMs allow currencies
to trade without intervention by governments and
central banks.
2. While Fixed ERMs involve any measures necessary
to keep rates set at a particular value.
3. Managed ERMs fall somewhere between these two
categories.
Main Factors that Influence
Exchange Rates
1. International Trade (Import/Export)
2. Interest Rates
3. Balance of Payments
4. Speculation
5. Government Debt
6. Government Intervention
7. Economic Indicators
How does the Exchange Rate
affect International Trades?
The exchange rate has an effect on
the trade surplus (or deficit), which in turn
affects the exchange rate, and so on.
In general, a weaker domestic currency
stimulates exports and makes imports more
expensive.
Conversely, a strong domestic currency hampers
exports and makes imports cheaper.
Understanding Exchange Rate
Exchange Rate is the rate at which two national currencies are
exchanged. Exchange rate quotations are two types
Direct quotation: If exchange rate is expressed in variable
units of domestic currency for a fixed unit
of Foreign currency. Example: 1 USD = BDT 78.15
Indirect quotation: If exchange rate is expressed in variable
units of Foreign currency for a fixed unit of domestic currency.
Example: 1 EUR = USD 1.1015/20
Exchange Rate Quotation
Usually an Exchange rate quotation has both
buying (Bid) and Selling (Ask). Difference
between buying (Bid) and Selling (Ask) rates is
known as Spread.
Base Currency
Quoted Currency
Basis point
1 EUR=USD 1.88
Big Figure
PIPs
/55
Bid
Offer
Understanding FX
Rate Sheet of UCB
Bangladesh Bank introduced
Floating Exchange Rate in 2003
Sell to Customers:
1.
2.
TT/OD
BC
: For selling foreign TT, TC etc.
: For lodgment of import documents.
Buy from Customers:
1.
2.
3.
4.
5.
6.
TT Clean
: For buying inward foreign TT remittances.
OD SIGHT EXPORT: For buying of sight export bills.
OD TRANSFER
: For buying of foreign collection cheques, DDs,
TCs, MTs etc.
TT (DOC)
: For export bill collection.
USANCE
: For buying of usance bills.
FORWARD
:Used for purchase FC from Exporter & sell FC to
Importer