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Published by: Centre for Islamic Banking and Finance
Published in: 1999

Abstract

Brazil''s devaluation of the real on January 13th 1999 strengthened the conviction of those who argue that, when it comes to the choice of an exchange rate regime, there is no longer any feasible middle way. This view is reinforced by the earlier experience with the 1997-1998 Asian currency collapse. Countries, it is argued, must either fix their currencies permanently and irrevocably, ideally through the introduction of a currency board, let them float freely or abolish their own currency completely and adopt the currency of another country. Attempts to peg the exchange rate, it is argued, leaving open the possibility of occasional changes in the parity are doomed to fail given the integrated nature of today''s capital markets. This case reviews the ideas behind currency fixing through the introduction of a currency board. In particular, it describes the circumstances under which it is, or is not a suitable exchange rate arrangement. This case is suitable for undergraduate and postgraduate courses with an international finance, international banking or international business component. The themes covered also provide an analytical framework in which multi-national company decision making has to be analysed whether from the point of view of international finance, international marketing or international corporate strategy. It is particularly suitable for business situations where foreign exchange hedging and arbitrage decisions are being discussed.

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Abstract

Brazil''s devaluation of the real on January 13th 1999 strengthened the conviction of those who argue that, when it comes to the choice of an exchange rate regime, there is no longer any feasible middle way. This view is reinforced by the earlier experience with the 1997-1998 Asian currency collapse. Countries, it is argued, must either fix their currencies permanently and irrevocably, ideally through the introduction of a currency board, let them float freely or abolish their own currency completely and adopt the currency of another country. Attempts to peg the exchange rate, it is argued, leaving open the possibility of occasional changes in the parity are doomed to fail given the integrated nature of today''s capital markets. This case reviews the ideas behind currency fixing through the introduction of a currency board. In particular, it describes the circumstances under which it is, or is not a suitable exchange rate arrangement. This case is suitable for undergraduate and postgraduate courses with an international finance, international banking or international business component. The themes covered also provide an analytical framework in which multi-national company decision making has to be analysed whether from the point of view of international finance, international marketing or international corporate strategy. It is particularly suitable for business situations where foreign exchange hedging and arbitrage decisions are being discussed.

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