NAME: SHARIQ ALTAF

ROLL NO: MBA-18-13

Q1. Fixed exchange rate is the rate which is officially fixed by the government or
monetary authority and not determined by market forces. Only a very small deviation
from this fixed value is possible. Once the rate determined, the central bank undertakes to
buy and sell foreign exchange and the private purchase and sales are postponed while as
the system in which rate of exchange is determined by forces of demand and supply of
foreign exchange market is called Flexible Exchange Rate System. The value of currency
is allowed to fluctuate or adjust freely according to change in demand and supply of
foreign exchange. There is no official intervention in foreign exchange market. Under
this system the central bank without intervention allows the exchange rate to adjust so as
to equate the supply and demand for foreign currency. In 1973, when Bretton Woods
completely collapsed countries started to implement flexible exchange rate regimes.
A flexible exchange rate system is solely determined by market forces of demand and
supply of foreign and domestic currency, and where government intervention is totally
inexistent. It allows countries to retain their monetary independence, which basically
means they can focus on the internal aspects of their economy, and
control inflation and unemployment without worrying about external aspects.

Q2. 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. The Bretton Woods Agreement and System created a collective international
currency exchange regime that lasted from the mid-1940s to the early 1970s. Its broad
features were:-

1) The Dollar is pegged to the gold. The official gold price that US government regulated
is 35 dollars for one ounce of gold.
2) All other currencies are pegged to the dollar. Other governments set their exchange
rates to dollars by the gold standard.
3) Adjustable fixed exchange rates. The exchange rate between other currencies and
dollars can only fluctuate within 1% on the basic of legal exchange rate.
4) The principle for currency conversion and international payment and settlement.
Member countries are not allowed to set restriction for international payment and
settlement.
5) The USD as a reserve currency. The USD works as the international reserve currency
to compensate for the short supply of gold.
6) The adjustment of international payment.
The factors responsible for its collapse are as follows:
(i) Adjustment Problem
(ii) Triffin Dilemma
(iii) The Liquidity Problem
(iv) Speculation and Short Term Capital Movements
(v) Conditions of Inflation

Q3. (A).The various international money market instruments are:

Promissory Note: A promissory note is one of the earliest type of bills. It is a financial
instrument with a written promise by one party, to pay to another party, a definite sum of
money by demand or at a specified future date, although it falls in due for payment after
90 days within three days of grace. However, Promissory notes are usually not used in
the business, but USA is an exception.

Bills of exchange or commercial bills: The bills of exchange can be compared to the
promissory note; besides it is drawn by the creditor and is accepted by the bank of the
debater. The bill of exchange can be discounted by the creditor with a bank or a broker.
Additionally, there is a foreign bill of exchange which becomes due for payment from the
date of acceptance. However, the remaining procedure is the same for the internal bills of
exchange.

Call and Notice Money: Call and Notice Money exist in the market. With respect to Call
Money, the funds are borrowed and lent for one day, whereas in the Notice Market, they
are borrowed and lent up to 14 days, without any collateral security. The commercial
banks and cooperative banks borrow and lend funds in this market. However, the all-
India financial institutions and mutual funds only participate as lenders of funds.

Inter-bank Term Market: The inter-bank term market is for the cooperative and
commercial banks in India who borrow and lend funds for a period of over 14 days and
up to 90 days. This is done without any collateral security at the rates determined by
markets.
(B) Crawling peg: A crawling peg is a system of exchange rate adjustments in which a
currency with a fixed exchange rate is allowed to fluctuate within a band of rates. The par
value of the stated currency and the band of rates may also be adjusted frequently,
particularly in times of high exchange rate volatility. Crawling pegs are often used to
control currency moves when there is a threat of devaluation due to factors such as
inflation or economic instability.

Currency Board Arrangements: It is a monetary regime based on an explicit legislative

commitment to exchange domestic currency for a specified foreign currency at a fixed
exchange rate, combined with restrictions on the issuing authority to ensure the
fulfillment of its legal obligation. This implies that domestic currency will be issued only
against foreign exchange and that it remains fully backed by foreign assets.

Free Float: A free-float methodology is a method by which the market capitalization of

an index's underlying companies is calculated. Free-float methodology market
capitalization is calculated by taking the equity's price and multiplying it by the number
of shares readily available in the market. 
Q6. (A) The methods of raising equity international markets are explained as:

EURO EQUITY: Euro equity issue represents shares denominated in dollar terms,
issued by non-American and non-European companies to list their shares on American
and European stock exchanges by complying the regulations of respective stock
exchanges where the shares are intended to be listed. The euro equity issue can be made
in different forms like Global Depository Receipts, American Depository Receipts,
European Depository Receipts, Singapore Depository Receipts etc. representing the
specific countries or a particular country. The features of all these foreign equities are the
same except the place of issue and listing. The popular forms of foreign equity, GDR and
ADR which are discussed below:

Global Depository Receipts (GDR): A GDR represents a certain number of equity

shares denominated in dollar, which is tradable on a stock exchange in Europe or USA.
For example, a GDR of $50 may comprise of two equity shares of $25 each equivalent to
Rs.1000/- each, at the rate of exchange prevailing at the time of the issue.

American Depository Receipts (ADR): There is no much difference between GDR and
ADR. The difference is only the place of issue and listing. GDR can be issued in USA
and other European countries and it is listed on the stock exchanges of USA and
Luxembourg. Whereas, American Depository Receipts (ADRs) are the depository
receipts denominated in US dollars, issued in USA by non-US Company and traded on
the stock exchange of USA only. All other features of ADRs are the same as GDR.

Other depository receipts: The other type of euro equity depends on the country where
the euro equity is issued. For example euro equity issued in European countries is called
as European Depository Receipts (EDRs), euro equity issued in Singapore is called as
Singapore Depository Receipts.

(B) Purchasing Power Parity: Purchasing power parity (PPP) is an economic theory of
exchange rate determination. According to this theory, rate of exchange between two
countries depends upon the relative purchasing power of their respective currencies. It
compares the cost of living between two or more countries. The basis for PPP is the law
of one price. In the absence of transportation and other transaction costs, competitive
markets will equalize the price of an identical good in two countries when the prices are
expressed in the same currency. The World Bank computes PPP for each country in the
world. It provides a map that shows the PPP ratio compared to the United States.
Fisher’s Parity: The Fisher’s Parity or International Fisher Effect is an exchange-rate
model that extends the standard Fisher Effect and is used in forex trading and analysis. It
is based on present and future risk-free nominal interest rates rather than pure inflation,
and it is used to predict and understand the present and future spot currency price
movements. It is assumed that the risk-free aspects of capital must be allowed to free
float between nations that comprise a particular currency pair. According to this theory,
countries with higher nominal interest rates experience higher rates of inflation, which
will result in currency depreciation against other currencies.