BUCAS GRANDE FOUNDATION COLLEGE

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LEARNING MODULE-3

in

ENT 13
INTERNATIONAL BUSINESS AND TRADE

(Bachelor of Science in Entrepreneurship)

2ND Semester, AY 2021-2022

Prepared by:

Jackylou Hingpit Canta

Instructor

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 1

 TABLE OF CONTENTS

Module 3 Topics Pages

An Introduction to the International Monetary Fund (IMF) ----------------------- 3

International Monetary Fund Benefits ------------------------------------------------ 4
International Monetary Fund Works -------------------------------------------------- 4
Types of International Monetary Fund Loans --------------------------------------- 4
Main Functions of International Monetary Fund ------------------------------------ 5
Functions of IMF ------------------------------------------------------------------------- 6
Fixed and Floating Exchange Rate ---------------------------------------------------- 6
Difference between Fixed and Floating Exchange Rate ---------------------------- 6
The Impact of European Currency (Euro) -------------------------------------------- 7
Exchange Rate Formula ------------------------------------------------------------------ 7

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 2

TITLE: THE INTERNATIONAL MONETARY SYSTEM

Learning Objectives
In this lesson, the learners will be able to:
a. Identify various aspects of international monetary fund;
b. Understand the differences between fixed and floating
exchange rates;
c. Calculate and convert the exchange rates.

Learning Activities
Read and comprehend the whole concept.

An Introduction to the International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an international organization that
provides financial assistance and advice to member countries. This article will discuss
the main functions of the IMF, which has become an integral to the development of
financial markets worldwide and the growth of developing countries.
It was established at a United Nations Monetary and Financial Conference, also
known as Bretton Woods Conference, on 22 July 1944 as an organ under the UN
System. The IMF headquarters is located in Washington D.C., U.S.A. Along with its
sister organization, the World Bank, it was created to prevent economic crises such as
the Great Depression. It is a specialized agency of the United Nations and is run by its
190 member countries. Membership is open to any country that conducts foreign policy
and accepts the organization's statutes.
The IMF is responsible for promoting international monetary cooperation;
facilitating the expansion and balanced growth of international trade; promoting
exchange stability; assisting in the establishment of a multilateral system of payments;
and providing resources available to members experiencing balance of payments
difficulties.
To achieve these goals, the IMF focuses and advises on the macroeconomic
policies of a country, which impacts its exchange rate, governmental budget, money,
and credit management. The IMF will also appraise a country's financial sector and
regulatory policies, as well as structural policies within the macroeconomy that relate to
the labor market and employment.
In addition, as a fund, it may offer financial assistance to nations in need of
correcting balance of payment discrepancies. The IMF is entrusted with nurturing
economic growth and maintaining high levels of employment within countries.

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 3

International Monetary Fund Benefits
The IMF offers its assistance in the form of surveillance, which it conducts on a
yearly basis for individual countries, regions, and the global economy as a whole.
However, a country may ask for financial assistance if it finds itself in an economic
crisis, whether caused by a sudden shock to its economy or poor macroeconomic
planning. A financial crisis will result in severe devaluation of the country's currency or a
major depletion of the nation's foreign reserves. In return for the IMF's help, a country
is usually required to embark on an IMF-monitored economic reform program,
otherwise known as Structural Adjustment Programs (SAPs).

International Monetary Fund Works

The IMF is funded by quota subscriptions paid by member states. The size of
each quota is determined by the size of each member's economy. The quota in turn
determines the weight each country has within the IMF—and hence it’s voting rights—
as well as how much financing it can receive from the IMF. Twenty-five percent of each
country's quota is paid in the form of special drawing rights (SDRs), which are a claim
on the freely usable currencies of IMF members.
Before SDRs, the Bretton Woods system had been based on a fixed exchange
rate, and it was feared that there would not be enough reserves to finance global
economic growth. Therefore, in 1969, the IMF created the SDRs, which are a kind of
international reserve asset. They were created to supplement the international reserves
of the time, which were gold and the U.S. dollar.
The SDR is an international reserve asset, created by the IMF in 1969 to
supplement the existing official reserves of member countries with a view to supporting
the expansion of world trade and financial development. The SDR also serves as the
unit of account of the IMF. The SDR is not a currency; it is a unit of account by which
member states can exchange with one another in order to settle international accounts.
The value of the SDR is adjusted daily against a basket of currencies, which
includes:
a. U.S. dollar,
b. Japanese yen,
c. euro,
d. British pound,
e. Chinese RMB added in November 2015

Types of International Monetary Fund Loans

There are three more widely implemented facilities by which the IMF can lend its
money.
1. A Stand-By Arrangement (SBA) offers financing of a short-term balance of
payments. The SBA is designed to help countries address short-term balance of
payments problems. Stand-by is the most commonly used facility. The length of
a SBA is typically 12-24 months, and repayment is normally expected within 2¼-
4 years. Surcharges apply to high access levels.
2. The Extended Fund Facility (EFF) is a medium-term arrangement by which
countries can borrow a certain amount of money, typically over four to 10 years.
The EFF aims to address structural problems within the macroeconomy that are
causing chronic balance of payment inequities. The structural problems are

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 4

 addressed through financial and tax sector reform and the privatization of public
enterprises.
3. The third main facility offered by the IMF is known as the Poverty Reduction and
Growth Facility (PRGF). As the name implies, it aims to reduce poverty in the
poorest of member countries while laying the foundations for economic
development. Loans are administered with especially low interest rates.
All facilities of the IMF aim to create sustainable development within a country and
try to create policies that will be accepted by the local population. However, the IMF is
not an aid agency, so all loans are given on the condition that the country implements
the SAPs and makes it a priority to pay back what it has borrowed. Countries that are
under IMF programs are typically developing, transitional, and emerging market
countries (countries that have faced financial crises).
The Financial Sector Assessment Program (FSAP), a joint effort by the IMF and
World Bank aims to promote the soundness of financial systems in member countries.
Work under the program seeks to identify the strengths and vulnerabilities of a
country's financial system, and to help prioritize policy reforms.

Main Functions of International Monetary Fund

The IMF employs three main functions – surveillance, financial assistance, and
technical assistance – to promote the stability of the international monetary and
financial system.
1. Surveillance - The IMF closely monitors each member country's economic and
financial developments and holds a policy dialogue with a member country on a
regular basis (also known as Article IV Consultation), usually once each year, to
assess its economic conditions with a view to providing policy recommendations.
The IMF also reviews global and regional developments and outlook based on
information from individual consultations. The IMF publishes such assessment
on the multilateral surveillance through the World Economic Outlook and the
Global Financial Stability Report on a semi-annual basis.
2. Financial Assistance - The IMF lends to its member countries facing balance of
payments problems in order to facilitate the adjustment process and restore
member countries' economic growth and stability through various loan
instruments or "facilities". An IMF loan is usually provided under an
"arrangement," requiring a borrowing country to undertake the specific policies
and measures to resolve its balance of payments problem as specified in a
"Letter of Intent." Most IMF loans are primarily financed by its member
countries through payments of quotas. Thus, the IMF's lending capacity is
mainly determined by the total amount of quotas. Nevertheless, if necessary,
the IMF may borrow from a number of its financially strongest member countries
through the New Arrangements to Borrow (NAB) or the General Arrangements to
Borrow (GAB).
3. Technical Assistance - The IMF provides technical assistance to help member
countries strengthen their capacity to design and implement effective policies in
four areas, namely,
a. monetary and financial policies,
b. fiscal policy and management,
c. statistics and
d. economic and financial legislation.

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 5

Functions of IMF
 International monetary cooperation.
 Promote exchange rate stability.
 To help deal with balance of payments adjustment
 Help deal with economic crisis by providing international coordination – loans,
plus advice.

Fixed and Floating Exchange Rate

 Exchange rate is a rate ate which one currency is traded with another. In other
words, it is the value of one currency with respect to another currency.
 Fixed exchange rate or pegged exchange rate is a kind of currency exchange
system in which value of one currency is fixed against major world currency like
the dollar, euro and pound etc. or with another measure of significance worth
like gold. The central bank usually plays an active part to maintain official
currency rate by buying and selling home currency in the international market in
return for currency to which it is pegged.
 Floating or flexible exchange rate is determined by supply and demand forces in
the private market. If the value of currency is high its demand will increase and
vice versa. The central may intervene to control inflation and stability.

Difference between Fixed and Floating Exchange Rate

Fixed Exchange Rate Floating Exchange Rate

It refers to rate sets and maintain by It is the rate which changes with
Meaning central bank. respect to changes in the
market.

Controlled by Central government or central bank Demand and supply forces in the
market
When currency price increases, it is When currency price increases, it
Changes called revaluation and when price is called appreciation and when
decreases, it is called devaluation. price decreases, it is called
depreciation.
It might occur when there are It is an integral part of this
Speculation chances of changes in policies of system and occurs normally
government

Government Government intervenes at the time of No interference of the

intervention high inflation to stable the currency government

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 6

The Impact of European Curency (Euro)
By severing the traditional link between money and state sovereignty, the euro
has become one currency issued by one central bank in an area of - for the time being
at least - 11 states which, in this respect, have become one economy - the euro area.
Although the largest single country in the euro area accounts for slightly more than 4%
of world GDP, the euro area as a whole accounts for 15%. This is less than the share of
the United States, at 20.5% of world GDP, but around twice that of Japan, at 7.8%.
Moreover, the euro area has the highest share of world trade, with a ratio of area-wide
exports to total world exports of 19.5%, well ahead of the shares of both the United
States and Japan, at 15% and 8.5% respectively.
Given the weight of the euro area in the world economy and the legacy of the
former national currencies which have been replaced by the euro, it is no surprise that
the euro is the second most widely used currency at the international level. In this
respect, the stance of the Eurosystem, consisting of the European Central Bank and the
national central banks of the euro area, is based on two basic principles.
First, since the internationalization of the euro is mainly a market-driven process,
the Euro system adopts a neutral stance, neither fostering nor hindering the
international use of its currency.
Second, the implications of the international role of the euro for domestic
monetary policy will not prevent the Euro system from maintaining price stability
as its primary objective.
Price stability is also a key precondition for a currency to develop an international
role. It is a necessary requirement for investors outside the euro area to be confident
that their purchasing power will be preserved over time, since price instability
constitutes one of the main factors which cause exchange rate and asset price volatility.
In the future, the international role of the euro will eventually hinge on the validity
of the fundamental idea underlying its creation, namely the idea that important
components of sovereignty can be pooled and shared among nations in the pursuit of
common economic and political objectives. Such a belief, of course, lends itself to being
challenged, as do all innovative concepts.
Today, shall first try to answer these fundamental questions relating to the
"domestic foundations" of the euro. This will be helpful in providing a better
comprehension of the international impact of the euro in three specific areas which are
crucial:
the use of the euro by the business community as an investment and financing
currency in the global financial system (market impact);
the new role played by the euro area in the process of international co-operation
(first policy impact); and
the importance of the euro for the process of regional integration in Europe and
Africa, and the role that this process may play with regard to possible integration
in other regions of the world (second policy impact).

Exchange Rate Formula

The exchange rate is defined as the rate based on which two countries are
involved in trade exchange marketable items or commodities. It is the cost of
exchanging one currency for another currency. Therefore, can calculate the exchange
rate as per the below-mentioned relationship: –

Exchange Rate = Money in Foreign Currency / Money in Domestic Currency

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 7

 Additionally, it can also be determined as per the below-mentioned relationship: –

Exchange Rate = Money in After Exchange / Money Before Exchange

The equation for the exchange rate can be calculated by using the following steps:

1. Firstly, determine the amount to be transferred or exchanged from domestic currency

to foreign currency.
2. Next, the individual can access foreign exchange markets through trading platforms or
through financial institutions to determine the available exchange rates prevalent
between the two nations
3. Next, multiply the exchange rate with the domestic currency to arrive at the foreign
currency.

Example:
Let’s say, you have £1,000 set aside as spending money for your holiday in
California. You look online and you see that the current exchange rate is GBP/USD 1.25.
As the base currency in that exchange rate is the same as the currency you want to
convert (GBP), you need to multiply:
A simple way of thinking about calculating the exchange rate is (e.g. from £ to
$):
Let, A = Money before exchange
B = Exchange rate
C = Money after exchange

Let us take the formula of exchange rate B = C/A and derived the formula into
C=AxB

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 8

Solution:
A = £1000, B = 1.25, C = ?
C=AxB
= £1,000 x 1.25
= $1,250
Result: Your £1,000 will get you $1,250 for your holiday.
But what if the exchange rate is swapped around? It now looks like this: USD/GBP 0.80
The base currency has changed to USD, so the exchange rate is now telling us
that 1 dollar can buy you £0.80. However, we can still use this new exchange rate to
convert GBP into USD. We just need to reverse the formula and divide our £1,000 by
£0.80 per $1. The result is the same as above: $1,250.

ACTIVITY
Instruction: Answer the following questions below. Write your answers in a piece of
paper.
1. This problem is connected from your given example, you want to convert your
£1,000 holiday spending money into dollars then you have the options of:
a. Exchanging it at a bank for GBP/USD 1.22
b. Exchanging it at an airport kiosk for USD/GBP 0.84
c. Show your solutions.
2. Which deal should you go for to spend your holiday? Why?
3. A trader wants to invest in the exchange-traded funds traded in US markets. The
trader has INR 10,000 to invest in the exchange-traded funds traded in the
offshore market. However, the trader lives in India, and 1 INR corresponds to
0.014 USD. Find and help the trader determine the value of INR investment in
terms of US currency. (INR to USD)
4. Explain how the special drawing rights (SDR) is constructed.
5. What were the main objectives of the Bretton Woods system?
6. How does international monetary fund works?
7. Distinguish the changes between fixed and floating exchange rate.

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 9

REFERENCES:
blog.revolut.com/a/how-to-calculate-exchange-rate
www.wallstreetmojo.com/exchange-rate-formula
https://www.ecb.europa.eu/press/key/date/2000/html/sp000113.en.html
https://www.investopedia.com/ask/answers/051415/how-does-international-monetary-
fund-function.asp
https://www.bot.or.th/English/AboutBOT/RolesAndHistory/Pages/IMF.aspx

ENT 13 – INTERNATIONAL BUSINESS AND TRADE 10