Currency

William Richards

Description

This text is designed to establish an understanding of the fundamentals of currency. It provides a cursory overview of the international Monetary System of which currency is the core. To enhance the readers' foundation, the second phase of the text provides an explanation of how and why the International Monetary Fund was established. That formation is tracked from initial formation of a fixed par value to our modern day system of floating exchange rates. With those fundamentals established, a presentation is provided to enable the reader to entertain the basic functioning of currency in the context of a global setting; the functioning of domestic international markets and external-Eurocurrency markets. That function process introduces sovereign and credit risks that accompany currency in the International Monetary System. A brief but concise presentation is provided to the reader to explain the source of these risks and the reason. Lastly, currency in itself has taxable transaction features. In a global setting it necessitates recognition of a means to manage those risks inherent in global trade, external currency markets, and capital investment. These facets are explained and documented.

Sujets

• Economie gestion
• Monetary economics
• Political economy

Informations

• Publié par: First Edition Design Publishing
• Date de parution: 15 mars 2015
• Nombre de lectures: 1
• EAN13: 9781622878352
• Langue: English

Extrait

CURRENCY
_________
FUNDAMENTALS AND FUNCTIONS
by
WILLIAM L. RICHARDS JR. S.J.D.
Currency, Fundamentals and Functions
Copyright ©2015 William L. Richards Jr.

ISBN 978-1622-878-35-2 EBOOK

January 2015

Published and Distributed by
First Edition Design Publishing, Inc.
P.O. Box 20217, Sarasota, FL 34276-3217
www.firsteditiondesignpublishing.com



ALL R I G H T S R E S E R V E D. No p a r t o f t h i s b oo k pub li ca t i o n m a y b e r e p r o du ce d, s t o r e d i n a r e t r i e v a l s y s t e m , o r t r a n s mit t e d i n a ny f o r m o r by a ny m e a ns ─ e l e c t r o n i c , m e c h a n i c a l , p h o t o - c o p y , r ec o r d i n g, or a ny o t h e r ─ e x ce pt b r i e f qu ot a t i o n i n r e v i e w s , w i t h o ut t h e p r i o r p e r mi ss i on o f t h e a u t h o r or publisher .

No patent liability is assumed with respect to the use of information contained herein. Although every precaution has been taken in the preparation of this book, the publisher and author assume no responsibility for errors or omissions. Neither is any liability assumed for damages resulting from the use of the information contained herein.
A most sincere note of appreciation to
Jane Eichwald,
Ambler Document Processing,
Norwalk, Connecticut.
Table of Contents

Preface

Chapter One - The International Monetary System and Currency
Section 1. Introduction.
Section 2. International Monetary System.
Section 3. Currency Generally.

Chapter Two - Currency and the International Monetary Fund
Section 1. Introduction
Section 2. IMF Resource Facility
Section 3. Standing Arrangements
Section 4. Special Drawing Rights
Section 5. Smithsonian Agreement
Section 6. Jamaican Agreement

Chapter Three - Currency and the External Financial Markets
Section 1. Introduction.
Section 2. External Markets.
Section 3. Structure and Regulation of Eurocurrency Banks.
Section 4. Eurocurrency Markets in Motion.
Section 5. Interest Rate Structure Influence.
Section 6. National Monetary Policy and External Markets
Section 7. Lender of Last Resort.

Chapter Four - Currency Risk and Euro Denomination
Section 1. Introduction.
Section 2. Eurocurrency Credit Risk.

Chapter Five - Currency–Financial Instruments–Taxation
Section 1. Financial Instruments of Risk Management.
Section 2. Market Instruments and Taxation

Endnotes-Chapter One
Endnotes-Chapter Two
Endnotes-Chapter Three
Endnotes-Chapter Four
Endnotes-Chapter Five
Preface

Currency serves the international monetary system and facilitates the integration of global economies. Inter-connected economies function by virtue of currency and the financial markets.
The introductory segment provides an overview of the International Monetary System and its core relation to currency. There are two basic influences of the monetary system upon currencies, trade and capital flows. This has as its purpose to provide a general inter-connection of currency movement in connection with those two factors.
In addition to these main influences, trade and capital flows, a foundation is provided to link domestic currency of sovereigns to the external-Eurocurrency markets. It is this linkage that sets the dynamics of how domestic economies are linked to the international market place through currencies.
This basic introduction sets the premise to explain the framework that established the body of rules in which each sovereign - member became a functioning participant in maintaining an international organization of affiliation, the International Monetary Fund. The rules that govern members defined the rudimentary mechanics of currency of a sovereign. Those guidelines seek to provide a fluid essence to the structure and valuation of currency, incorporating those values with a floating exchange mechanism among sovereigns. It seeks to establish for the reader the necessity to maintain equilibrium among sovereigns and a system to address imbalances. Those concepts are essential to the fundamentals of currency.
With those connecting facets in place, the transmission effects of domestic economies are explored. This is for the purpose of tuning the reader to the impacts of each sovereign’s domestic monetary, fiscal, and public policy upon the international financial markets. These impacts are reflected directly through affects upon currencies’ values and equilibrium of floating exchange rates.
The international community is impacted by domestic policies, yet the external-Eurocurrency market is a transmission reaction to domestic sovereigns. That is because the structure and regulation of Eurocurrency banks have at their roots, no regulation. They are self-regulated by market forces. This makes Eurocurrency that is a derivative of its domestic counter-part, a unique and market driven phenomenon.
As a logical extension with an unregulated Eurocurrency market structured by market force, risks formulate. The segment that then follows, currency risk and Euro denomination, addresses very briefly the basics of credit risk that evolve from the deregulation atmosphere and international banking laws. Risks in the international market place comprise generally, sovereign risks, legal risks, market risks, and credit risks. This focus is upon sovereign and credit risk as they pertain to offshore banking facilities and external Eurocurrency. It is designed to take the reader to the essential core issues that one considers in the Eurocurrency market.
The closing segment directs itself to the more basic financial instruments that have been generated to manage market and credit risk, as well as legal. In this regard, those instruments take on taxation consequences. The basic taxation affects of their functions in managing risks are presented to provide the essentials of their concept; the characterization, the timing, and the source of gain or loss attributable to these financial instruments.
Chapter One - The International Monetary System and Currency

Section 1. Introduction.

THE INTERNATIONAL MONETARY SYSTEM facilitates the settlement of international balance of payments between countries 1 . Its connection is its impact upon exchange rates that in turn impacts currency values 2 . The global economy has become reliant upon fluid international currency exchange rate expectations, as sovereign activity has accelerated dramatically. The risk associated with international sovereigns has increased as well. Market risk is the focus in this respect to enhance the understanding of the exposure. To adequately lay a foundation for market risk requires establishing the fundamentals. At the core of the international monetary system is currency.
Basically the balance of payment account is the standard of one side of the equation of a T account in which there is a credit entry and the other a debit entry. Those totals theoretically are to be balanced. The debit and credit of that account comprises the current account 3 side of the accounting equation. All indebtedness reflected necessitates the need to finance the short fall. In the alternative if there is a surplus within this accounting measure, an exporting of capital adjusts the imbalance.
In concept, international economics is geared to a mercantile system. The mercantile concept is an economic system of political and economic policy, evolving with the modern national state in its rivalry with other nations. This system regards money as a store of wealth and the objective of the state is the importation of currency by the act of exporting the utmost possible quantity of its products. It seeks in theory to import as little as possible, thereby establishing a favorable balance of trade. 4
There are two dominant themes that are enshrined in international economics that influence currency exchange rate movement. One factor, trade balance, is considered by traditional concept to influence exchange rate expectations. The other significant economic influence upon the exchange rate equilibrium is capital movement between global financial markets. It has taken on a much greater importance in recent years with innovation and technology.
Trade is without question a vital component. There is an absolute linkage between trade and a country’s currency exchange rate. That effect can drive the economy or have a degenerative result. The effects are two fold. A country that is afflicted with persistent trade deficits will encounter a loss of purchasing power parity of its currency as a general thesis. The effects of a loss of purchasing power parity will likely cause a downward pressure upon its exchange rate. The debilitating affect results because an inflationary environment is created.
Imports place in to motion a demand for higher prices. The imports necessary to the economy and production such as commodities, materials, and agriculture products result in a rise in the cost of production, along with the cost of consumer goods. This differs from a surplus economy.
A surplus economy will experience a persistent upward pressure upon its exchange rate. A rising exchange rate economy will result in their exports becoming more expensive in the open market. Imports to their economy will in turn become less expensive. To counter balance this effect, the surplus economy will experience a need to export capital to balance the trade surplus. This requires that the economy lend to other countries to provide them with the requisite credit.
The other country doing business with the surplus economy will exert demand upon the currency of the surplus economy that in turn exerts an upward pressure on their currency. Without corrective adjustments, the surplus economy can experience deflation, theoretically. The slowing can result from less production required to produce goods for export; that is its rate of capacity can decrease and employment then rise.
The lower prices of imports