Post on 22-Feb-2016
description
ECONOMICS/FINANCE 372
International Finance
Course Objective: To develop an understanding of the significance that the existence of different currencies around the world has on economic and financial activity. The causes and effects of exchange rate behavior will be investigated. As in any economics course, the effects of government policies and the role of government are considered. As in any finance course, the profound influence that uncertainty (a.k.a. risk) has on economic and financial behavior is emphasized.
The Balance of Payments (BOP) Accounts:
A record of all economic activity that flows between residents of a country and residents of the rest of the world in a given period of time (e.g., a year), where all values are in terms of the country’s own currency.
The two primary component accounts of the BOP accounts are:
1) the Capital and Financial Account (formerly known just as the Capital Account)
2) the Current Account.
All transfers of asset ownership are recorded in the Capital and Financial Account (KFA)
All other flows (e.g., of goods, services) across the country’s borders are recorded in theCurrent Account (CA).
BOP accounting employs double-entry bookkeeping:
For every credit there is a debit, and For every debit there is a credit.
Credits in the CA: a flow (of goods or services) that gives rise to a payment “inward” from a non-resident.
Debits in the CA: a flow (of goods or services) that gives rise to a payment “outward” to a non-resident.
Credits in the KFA: the transfer of the ownership of an asset from a resident to a nonresident.
Debits in the KFA: the transfer of the ownership of an asset from a nonresident to a resident.
The Current Account is divided into 3 sub-accounts:
The goods account (CAG) records the flows of goods (across the borders)
The services account (CAS) records the flows of services
The factor services account (CAFS) records the flows of factor services.
CA = CAG + CAS + CAFS
The Capital and Financial Account (KFA) is also divided into 3 sub-accounts:
The long term, private financial account (KFALP) records the flows of the transfer of ownership across the border of long-term assets by private individuals and institutions.
The short-term, private financial account (KFASP) records the transfer of short-term assets by private individuals and institutions.
The government financial account (KFAGOV) records the acquisition or sale of another country’s currency by the country’s monetary authority.
KFA = KFALP + KFASP + KFAGOV
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
There are several “Key Balances” that are constructed using these six sub-accounts:
Trade Balance = CAG
Basic Balance = CA + KFALP
Official Reserves Transactions Balance (ORTB)(a.k.a. Overall Balance, or, Official Settlements Balance, or, The “Balance of Payments” or “BOP”) =
CA + KFALP + KFASP
KFAPRIVATE = KFALP + KFASP
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
A US resident pays a Canadian $10 in exchange for preparing her taxes, paying with a check on a Chicago bank.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
Tax preparation ($10 worth) is provided by the Canadian accountant to the US resident
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
$10
The US resident gives the Canadian a check for $10
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
$10
Key Balances:
The CURRENT ACCOUNT (CA) = -$10 (is in deficit by $10)
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
$10
Key Balances:
The CAPITAL AND FINANCIAL ACCOUNT (KFA) = +$10 (is in surplus
by $10)
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
$10
Key Balances:
The BASIC BALANCE (BB) = CA + KFALP = -$10
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
$10
Key Balances:
The (Merchandise) TRADE BALANCE (TB) = CAG = $0
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
$10
Key Balances:
The BALANCE OF PAYMENTS (BOP) = CA + KFALP + KFASP = $0
A UK resident buys a 5-yr US government bond (from an American) for $20, pays with a check on a British bank.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
$20 $10
The British resident takes ownership of the $20 LT Bond.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
$20 $20 $10
The British resident gives the $20 check to the American.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10
$20 $20 $10
CA = -10 KFA = +10 BB = +10 BOP = 0 TB = 0
A US resident receives $30 in interest payments on her 6-mo Peruvian bonds, paid with a check on a Peruvian bank.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10 $30
$20 $20 $10
A US resident provides services to the Peruvian borrower worth $30.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10 $30
$20 $20 $10 $30
A US resident receives the $30 check on the Peruvian bank.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10 $30
$20 $20 $10 $30
CA = +20 KFA = -20 BB = +40 BOP = 0 TB = 0
KFASP = - $40 (is in deficit by $40)
US Government buys $40 worth of Yen in the foreign exchange markets with newly printed $’s.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10 $30
$20 $20 $10 $40$30
US Government puts $40 worth of Yen in its vault.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10 $30
$20 $20 $10 $40$30 $40
A foreign resident takes possession of 40 newly printed $’s.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10 $30
$20 $20 $10 $40$30 $40
CA = +20 KFA = -20 BB = +40 BOP = +40 TB = 0
KFASP = 0 (is in balance)
A US resident pays $50 for a 180-day Japanese government security, pays with a Houston bank check.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10 $30
$20 $20 $10 $40$30 $40 $50
A US resident takes ownership of the 180-day Japanese government security (worth $50).
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10 $30
$20 $20 $10 $40$30 $40 $50 $50
The Japanese government takes possession of the $50 check on the US bank from the US resident.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$10 $30
$20 $20 $10 $40$30 $40 $50 $50
KFASP = 0 CA = +20 KFA = -20 BB = +40 BOP = +40
US firm sells $60 in lumber to Taiwan firm and is paid with a check on the Taiwan’s firm account in a US bank.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$60 $10 $30
$20 $20 $10 $40$30 $40 $50 $50
US firm delivers $60 in lumber to Taiwan firm.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$60 $10 $30
$20 $20 $10 $40$30 $40 $50 $50$60
The Taiwan firm gives the check for $60 on the US bank to the US seller.
Debit Credit Debit Credit Debit Credit
Debit Credit Debit Credit Debit Credit
CAG CAS CAFS
KFALP KFASP KFAGOV
$60 $10 $30
$20 $20 $10 $40$30 $40 $50 $50$60
KFASP = -60 BB = +100 BOP = +40 TB = +60
CA = +80 KFA = -80
1. A US resident pays a Canadian $10 in exchange for preparing her taxes, paying with a check on a Chicago bank.
2. A UK resident buys a 5-yr US government bond (from an American) for $20, pays with a check on a British bank.
3. A US resident receives $30 in interest payments on her 6-mo Peruvian bonds, paid with a check on a Peruvian bank.
4. US Government buys $40 worth of Yen in the foreign exchange markets with newly printed $’s.
5. A US resident pays $50 for a 180-day Japanese government security, pays with a Houston bank check.
6. US firm sells $60 in lumber to Taiwan firm and is paid with a check on the Taiwan’s firm account in a US bank.