Question

(4)(a)Briefly explain why the Classical Gold Standard period is described as a regime of FIXED Exchange

     Rate and suggest some reasons why you think many people in business, academia and politics still

     yearn for a return to the era.

     (b)How did BRETTON WOODS create a system that ultimately led to its own demise?

     (c)Suppose a FACTOR will buy an exporter’s Receivables at 2% per month discount. In addition, the

     Factor will charge an extra 1.95 % fee for nonrecourse financing. If the exporter decides to factor

     $2.5 million in 180-day receivables without recourse, how much will the exporter receive?. On an

      annualized basis, determine how much this transaction will cost the Factor.            

               

Answer 1

(a) The reason why the calssical gold standard period is described as regime of the fixed exchange because the central bank must always be prepared to give out gold in exhange from coin and currency upon demand,it must maintain gold reserves.Domestic currencies are freely convertible into gold at the fixed price and there was no restrictions on the import and export of gold.Gold coins can easily be circulated throughout the globe.

The gold standard was a system under which nearly all the countries fixed the value of their currencies in terms of a specific amount of gold or linked their currency to that of country which did so.As each currency was fixed in terms of gold exhchange rates between participating currencies were also fixed.

(b)The bretton Wood agreement was created in 1944 confrence of all the world war II allied nations. IT took place in Bretton Wood. Five elements were:

• The pegged rate or par value
• reserve currency
• designing IMF
• Financing trade deficits
• IMF operations

It was a good system but it collapsed in 1973 when all the currencies were allowed to float. A fixed exchnage rate system requires non reverse countries to give up the independence of their monetart policy regardless of domestic economic circumstances.This system broke down because of its fundamental flaw of pledging convertibilty to gold,which was unsustainable given to course of US economic policy.

Therefore the US decision to suspend gold convertability ended a key aspect of the Bretton Wood System.

(c) Factoring is on of the source for the short term financing.Exporter has decided to factor therefore: Amount received by expoter= factor amount- factoring discount- factor fees Factor amount = $2.5 million factor discount for 180 days (6 months)= 2.5* (2%*6months) = 2.5*12% = $0.3 million Factor fees= 1.95% of 2.5 = $0.04875 million Amount received by exporter = (2.5 - 0.3 - 0.04875)$ miilion = $ 2.15125 million

Annualized rate of factoring = (Cost of factoring/12)*100 ={(0.3+0.04875)/12}*100 =(0.34875/12)*100 = 2.91%