CFGS INTERNACIONAL TRADE

825 – INTERNATIONAL FINANCE

XAVIER CARRETÉ
ANALYSIS OF THE FUNCTIONING OF THE
FOREIGN EXCHANGE MARKET – 1ST PART
1.1 THE INTERNATIONAL FINANCIAL SYSTEM AND
INTERNATIONAL FINANCIAL ORGANIZATIONS.
ANALYSIS OF • The exponential growth of international trade during
THE the last fifty years has been accompanied by an
FUNCTIONING increase in the volume of monetary transactions in
OF THE foreign currencies and also by greater risk management
by companies and the creation of hedging mechanisms
FOREIGN to reduce -the bear.
EXCHANGE
MARKET
 The structure of the foreign exchange
In the section "Analysis of the functioning market is analyzed, the types of operations
of the foreign exchange market", you will carried out there, the regulatory
see the different bodies and institutions regulations, as well as the variations that
that regulate the international financial may occur in exchange rates. The different
system, as well as the foreign exchange components of the supply and demand for
markets. The main international financial currencies are detailed. There is also a
organizations and the different European review of the existing relationship between
monetary institutions are detailed. international trade operations, the
exchange rate and the interest rate.
 1.- ANALYSIS OF THE FUNCTIONING OF THE
FOREIGN EXCHANGE MARKET
1.1.3 Structure of the 1.1.3.1 Organizations and
foreign exchange market entities that participate in
or Foreign Exchange the foreign exchange
market (FOREX): market.
1.1.2 The European
1.1 The international monetary system and the
financial system and Monetary Union:
1.1.1 Euromarkets.
international financial European monetary
organizations. institutions. The Central 1.1.3.3 Types of
1.1.3.2 Regulatory
Bank transactions in the FOREX
regulations of the market market.

1.2 Operation of the

foreign exchange market:

1.3.2 The price or 1.3.3 Variables that

1.3 Convertible and non- 1.3.1 Supply and demand exchange rate: Buyer's influence the fluctuation of 1.3.4 Exchange rate and
convertible currency. for currencies. exchange and seller's the exchange rate of a interest rate of a currency.
exchange. currency.
1.1 THE •from the middle of the 20th century when external
INTERNATIONAL openness grew more important. This process of
greater interrelation between the economies of the
FINANCIAL SYSTEM different countries has led, at the same time, to more
regulation both bilaterally (between two countries)
and multilaterally (between more than two countries)
AND and the creation of different international bodies.
•Unlike domestic trade, which takes place within a
INTERNATIONAL country's borders and therefore uses the same
currency, international trade is characterized by the

FINANCIAL use of different currencies to carry out the

transactions between the different countries involved.
This makes it necessary to know what value some
ORGANIZATIONS. currencies have in relation to others at each moment
of time.
BRETTON
WOODS
Source: investopedia
• CONCEPT:
The international financial system is the set of bodies that regulate,
supervise and control the credit, financial and guarantee system, and
that define and execute monetary, banking and insurance policy, in
general, on a global scale.
• FUNCTIONS:
The main functions of the bodies that make up the international
financial system are to act as regulators, supervisors and controllers of
the credit, finance and guarantee system, as well as to define and
execute monetary policy, banking policy and securities policies and
Insurance.
• Where are these 2 organizations located?
• How many countries are on each one?
• Which is their main purpose?
IMF – MS. KRISTALINA GEORGIEVA

• International Monetary Fund (IMF) is an international body,

created in 1945, whose
• main objectives are to promote sustainable exchange policies on
an international scale, reduce poverty and facilitate international
trade

• promotes international monetary cooperation, facilitating the

expansion and balanced growth of international trade.
• It promotes the stability of exchange rates
IMF

Supervision: evaluates the

Financial assistance: grants Technical assistance: it helps
exchange policies of its
credits and loans to countries in various areas, such as the
members within the
with balance of payments design and implementation of
framework of a broad analysis
problems to support fiscal and monetary policies
of the general economic
adjustment and reform or the strengthening of
situation and the political
policies. institutions.
strategy of each member.
WB – MR. AJAY BANGA

• a source of financial and technical assistance for so-called

developing countries.
• It is integrated by 186 member countries.
• Its main purpose is to reduce poverty.
• Its headquarters are in Washington, in the United States
• The Bank for International Settlements (BPI) or Bank for International
Settlements (BIS), based in Basel (Switzerland), is controlled by 60 central banks
of the corresponding countries.
https://www.bis.org/about/member_cb.htm?m=2601

• Its main tasks are to promote international monetary and financial cooperation,
to be a monetary and economic research center and to offer banking services
(investment and financing) to member banks.
OTHER IMPORTANT:

• International Federation of Stock Exchanges, which promotes

the development of the financial markets of securities and derivatives
https://www.world-exchanges.org/

▪ Federal Reserve of the United States, the central bank of the

United States whose objective is economic growth, direct policy
American monetary policy, supervise financial institutions and maintain
the financial stability of this country.
https://www.federalreserve.gov/
WHAT DO YOU THINK ? LET’S DEBATE, BUT FIRST
READ THE ARTICLE
 1.1.1.- EUROMARKETS

• Euromarkets are financial markets where governments, financial institutions and companies place bonds
and obligations or grant loans in a currency other than the country of origin. In these financial markets,
deposits are accepted and loans granted in a currency outside the financial system that originated it.
• This currency is called the Eurocurrency.

• Euromarkets are free markets and not intervened by states, where there is no legislation or regulation
that controls interest rates since the only law is that of supply and demand. It is therefore a very
competitive market where prices (interest rates) tend to be low. Euromarkets should not be confused
with transacting within Europe or in euros. Examples of Euromarkets are the transaction of a United
States dollar lent in Spain or a euro deposited in Australia.
1.1.2.- EUROPEAN MONETARY INSTITUTIONS

• PURPOSE: with the ultimate purpose of creating an area of monetary stability

• In 1978, the initial idea was resumed with the Brussels summit and the creation of the
European Monetary System (EMS), which was based on the fixing of fixed but adjustable
exchange rates. Each currency of the European countries had an exchange rate with a
European unit of account or ECU (European currency unit), which was a weighted average of
the different currencies. The states had the obligation that the fluctuation of their national
currency did not exceed a margin of ± 2.25% (with the exception of the Italian lira, which was
between minus and plus 6%). The SME achieved sustainable monetary stability for ten years. In
1988 the European Council, an institution made up of the heads of state of the EC, promoted
the creation of an independent institution in charge of European monetary policy, the
European Central Bank (ECB).
THE MONETARY SNAKE

• https://www.cvce.eu/en/education/unit-
content/-/unit/02bb76df-d066-4c08-a58a-
d4686a3e68ff/38cf7d33-69b8-4550-a648-
67f433ac14a1
• The European Union Treaty of 1993 provided for the creation of
a single currency, the euro, and the gradual elimination of national
currencies. According to this treaty, those countries of the
European Union that met a whole series of requirements
(convergence criteria) could adopt the euro. On January 1,
2002, the single currency was put into circulation in 11 European
countries and, in 2017, 19 of the 28 member states of the
European Union already have the euro as their currency
(Germany, Austria, Belgium, Slovenia, Slovakia, Spain, Estonia,
Finland, France, Greece, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Portugal and Cyprus) and 5
non-EU countries also use the euro as their currency (Andorra,
Monaco, Montenegro, San Marino, the Vatican). All these countries
make up the so-called eurozone or euro zone.
 • the inflation rate, i.e. the change in the
THE CONVERGENCE general level of prices, cannot exceed by
CRITERIA TO ENTER THE 1.5% the average rate of the three states
with the least inflation,
EUROZONE • the public deficit cannot be higher than 3%,
the public debt cannot exceed 60% of the
gross domestic product,
ESTABLISHED IN THE MAASTRICHT TREATY,
ESTABLISH THE REQUIREMENTS THAT STATES • the interest rate cannot be 2% higher than
MUST MEET IN ORDER TO BE ADMITTED TO THE the average of the three states with the
EURO ZONE. least inflation,
• and the exchange rates must 'be within the
European monetary system.
7 EUROPEAN INSTITUTIONS

• the European Central Bank,

• the Eurosystem,
• the European System of Central Banks,
• the European Banking Authority,
• Ecofin,
• the Eurogroup
• the national banks of each European country.
THE EUROPEAN CENTRAL BANK (ECB) OR
EUROPEAN CENTRAL BANK (ECB)
• Responsible for European monetary policy.
• Make decisions independently, without depending on political decisions.
• Its main objective is to maintain price stability, meaning that inflation does not exceed 2%.
• It defines and executes the monetary policy of the euro zone, directs foreign exchange operations, takes
care of the international reserves of the European system of central banks and promotes the proper
functioning of the European financial market (among other tasks, it monitors the sector banking).
• It is also responsible for issuing the single European currency, the euro.
• It also has other functions, such as the preparation of statistics and cooperation in monetary aspects
with other European or international institutions. It was created by the Amsterdam Treaty of 1998 and is
based in Frankfurt (Germany).
THE EUROSYSTEM

• Is the monetary authority of the euro zone.

• It is formed by the European Central Bank and the national central banks of each of the
member states of the Union that have adopted the euro as their own currency.
• The operation of the Eurosystem is based on the fact that monetary policy is established by
the governing council of the European Central Bank and is executed by the national central
banks, which provide or withdraw liquidity from the financial system.
• The Eurosystem was created in order to differentiate it from the European System of Central
Banks, given that there are countries in the European Union that have not adopted the euro
as their currency. If all countries adopted the euro, the Eurosystem would be integrated into
the European System of Central Banks.
THE EUROPEAN SYSTEM OF CENTRAL BANKS
(ESCB)
• The European System of Central Banks (ESCB) is made up of the European Central Bank
and the 29 national central banks of all member countries of the European Union,
whether they have the euro or not. It has the same functions as the Eurosystem, but
taking into account that there are countries that do not have the euro.
THE EUROPEAN BANKING AUTHORITY

• The European Banking Authority is an independent institution of the European Union

that is responsible for preserving financial stability in the European Union and improving
cooperation in the field of supervision, among other tasks. Its main objective is to
maintain financial stability in the European Union and ensure the integrity, efficiency and
proper functioning of the banking sector. It is part of the European System of Financial
Supervision.
• ECOFIN, or Economic and Financial Affairs Council, is a body made up of the ministers of economy and
finance of all the member countries of the European Union. ECOFIN normally meets once a month and is in
charge of economic policy, fiscal matters, financial markets and capital circulation, as well as economic relations
with countries that do not belong to the European Union. It also prepares the EU budget and coordinates the
economic positions in international meetings with the International Monetary Fund, the World Bank and the
G20, among others.
• The Eurogroup is an informal body formed by the ministers of economy and finance of the countries of the
European Union whose currency is the euro. The Eurogroup, which normally meets once a month, has as its
main task the coordination of economic policies between the different countries of the euro zone.
• The national banks of each member country are responsible for supervising, putting currency into
circulation, advising their governments and making statistics, among other tasks.
1.1.3.- FOREX (FOREIGN EXCHAGE)

• There are currently a total of 182 different types of currency in the world.

• Each currency has a name and a three-letter code (ISO-4217) established by the International
Organization for Standardization (ISO). For example, in the case of the United States dollar,
the code is USD, while in the case of the euro, it is EUR.

• Currency transactions are bought and sold in the Forex (foreign exchange) currency market
to make payments for commercial transactions, obtain profitability by speculating or taking
advantage of the profitability of different interest rates or tourism, among others.
FOREX
• The foreign exchange market is a market that is not located in any
physical place, transactions are made directly between buyer and
seller.

• Therefore, it is a market free of controls and regulations. there are

three major currency markets: London, New York and Tokyo.
Between all three they collect more than half of the volume of
operations in foreign currencies. Due to the different time zones in
which these markets are located, the forex market is operational 24
hours a day

• The purchase and sale prices of the different currencies vary

constantly (every second) according to the events (financial, political,
economic, etc.) that take place in the world or possible rumors.
Therefore, it is very important to have updated information at all
times.