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

Abstract

The decision by a country to abolish its currency and then to replace it by another country''s currency is a concept known as dollarisation, and is the subject of this case. A country could eliminate the exchange rate altogether and substitute dollars for the domestic. As Manual Hinds, Finance Minister of El Salvador recently commented ''Having a currency is just too expensive''. What Hinds was referring to was that loans in the local currency, the colone, cost 7.5 percent more than loans in US dollars. This case discusses the issues that a country should take into account when deciding to ''dollarise''. 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

The decision by a country to abolish its currency and then to replace it by another country''s currency is a concept known as dollarisation, and is the subject of this case. A country could eliminate the exchange rate altogether and substitute dollars for the domestic. As Manual Hinds, Finance Minister of El Salvador recently commented ''Having a currency is just too expensive''. What Hinds was referring to was that loans in the local currency, the colone, cost 7.5 percent more than loans in US dollars. This case discusses the issues that a country should take into account when deciding to ''dollarise''. 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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