-1-

Last (bid) Prior Day †† Late Tuesday in New York.Australian Dollar (in dollars)0.7002 0.6953Hong Kong Dollar 7.7497 7.7500Indian Rupee 50.500 50.429Indonesian Rupiah 11520 11468Japanese Yen 97.54 97.78Malaysian Ringgit 3.6260 3.6258Singapore Dollar 1.5080 1.5135South Korean Won 1362.20 1386.58Taiwanese Dollar 33.820 33.852Thai Baht 35.400 35.411

11:36 a.m. EDT 03/25/09

Last (bid) Prior Day †† Late Tuesday in New York.Euro (in dollars) 1.3550 1.3451Czech Republic Koruna20.1140 20.1450Denmark Krone 5.4961 5.5371Norwegian Krone 6.5135 6.4020Polish Zloty 3.3485 3.3704Russian Ruble 33.6201 33.5010Swedish Krona 8.0789 8.1500Swiss Franc 1.1231 1.1317U.K. Pound (in dollars) 1.4610 1.4663Egyptian Pound 5.6220 5.6300Israeli Shekel 4.0920 4.0617South African Rand 9.4210 9.4967

Key Currency Cross Rates: 11:47 a.m. EDT 03/25/09

1.2242 1.6582 1.7870 1.0901 0.08597 0.01255 ---97.570 132.16 142.42 86.883 6.8516 --- 79.70114.240 19.289 20.787 12.681 --- 0.14595 11.6321.1230 1.5211 1.6392 --- 0.07886 0.01151 0.91733

0.68507 0.92793 --- 0.61004 0.04811 0.00702 0.559610.73828 --- 1.0777 0.65742 0.05184 0.00757 0.60307

--- 1.3545 1.4597 0.89047 0.07022 0.01025 0.81686(Source: Thomson Reuters)http://online.wsj.com/public/page/news-currency-currencies-trading.html

Chapter 2: The balance of payments and the foreign exchange market

1- Exchange rates and international transactions

Currency Overview

Asia 11:36 a.m. EDT 03/25/09

Europe & Others

Dollar Euro Pound SFranc Peso Yen CdnDlrCanadaJapanMexicoSwitzerlandU.K.EuroU.S.

•

•

-2-

The , denoted q, is the euro price of the American basket relative to that of the euro area:

q = (E x P$)/P€ (2-1)

The :

NEERi = j=1,j i

n

j.Eji (2-2a)

where,NEERi = (nominal) effective exchange rate of currency ,Eji = nominal exchange rate of currency with respect to currency ,

j = weight given to currency in the construction of the index; by definition the sum of weights equals one.

The :

REERi = j=1,j i

n

j.qji (2-2b)

where,NEERi = (nominal) effective exchange rate of currency ,qji = real exchange rate of currency with respect to currency ,

j = weight given to currency in the construction of the index; by definition the sum of weights equals one.

(Source: BIS, Quarterly review, March 2009)

real euro/dollar exchange rate

nominal effective exchange rate

real effective exchange rate

∑≠

ω

ω

∑≠

ω

ω

ii j

j

ii j

j

Graph 1:

-3-

, Tuesday, March 24, 2009

Jun 09 1.3622 1.3678 1.3431 -.0111 1.5740 1.2344 111,881

Sep 09 1.3547 1.3677 1.3440 -.0111 1.5672 1.2494 1,058

Dec 09 1.3598 1.3664 1.3479 -.0111 1.5622 1.2645 29Est vol 211,426; vol Mon 163,834; open int, 112,974, +1,655. Sources: Thomson Reuters; WSJ Market Data Group

http://online.wsj.com/mdc/public/page/2_3023-fut_currency-futures.html?mod=mdc_curr_pglnk

Euro interest rate

Dollar interest rate

Expected rate of euro depreciation against dollar

Rate of return difference between euro and dollar

depositsCase R€ R$ (Ee

€/$ - E€/$)/E€/$ R€ - R$ - (Ee€/$ - E€/$)/E€/$

1 0.04 0.06 0.00 -0.022 0.04 0.06 -0.02 0.003 0.04 0.06 -0.04 0.024 0.04 0.03 0.02 -0.01

The between dollar and euro deposits shows that the equality between the two assets’ expected rates of return measured in euros:

R€ = R$ + (Ee - E)/E (2.5)

Euro exchange rate, direct

terms

Interest rate on dollar deposits

Expected rate of depreciation of euro

against dollar

Expected euro return on dollar deposits

Case E R$ (0.65 - E)/E R€ + (0.65 - E)/E1 0.69 0.06 -0.058 0.0022 0.67 0.06 -0.030 0.0303 0.65 0.06 0.000 0.0604 0.63 0.06 0.032 0.0925 0.60 0.06 0.083 0.143

Currency Futures

Euro (CME)- 125,000; $ per

LIFETIM E

Open High Low Settle Chg High ( ) Low Open Int

1.3519

1.3525

1.3533

3. The balance of payments as the net demand for foreign currency

Table 2-1: Comparing euro rates of return on dollar and euro deposits

Table 2-2: Today’s euro/dollar exchange rate and the expected euro return of dollar deposit when Ee = per dollar

? ?

uncovered interest parity condition

-4-

The condition can be written

R€ = R$ + (F – E)/E (2-7)

with F the one-year forward price of dollars in terms of euros.

Figure 2-2: The relation between the current euro/doll r exchange rate and the expected euro return

on dollar deposits

Expected euro return on dollar deposits

Tod

ay's

eur

o/do

llar

exch

ange

rat

e

0,58

0,6

0,62

0,64

0,66

0,68

0,7

0,002 0,03 0,06 0,092 0,143

covered interest parity

-5-

Data as of April 31, 2008

The classification system is based on the members' actual, de facto arrangements as identified by IMF staff, which may differ from their officially announced arrangements. The scheme ranks exchange rate arrangements on the basis of their degree of flexibility and the existence of formal or informal commitments to exchange rate paths. It distinguishes among different forms of exchange rate arrangements, in addition to arrangements with no separate legal tender, to help assess the implications of the choice of exchange rate arrangement for the degree of independence of monetary policy. The system presents members' exchange rate regimes against alternative monetary policy frameworks in order to highlight the role of the exchange rate in braod economic policy and to illustrate that different exchange rate arrangements can be consistent with similar monetary frameworks. The following explains the categoreis.

The monetary authority stands ready to buy or sell foreign exchange at given quoted rates to maintain the exchange rate at its predetermined level or within a range (the exchange rate serves as the nominal anchor or intermediate target of monetary policy). These regimes cover exchange rate regimes with no separate legal tender, currency board arrangements, fixed pegs with or without bands, and crawling pegs with or without bands.

The monetary authority uses its instruments to achieve a target growth rate for a monetary such as reserve money, M1, or M2, and the targeted aggregate becomes the nominal anchor or intermediate target of monetary policy.

This involves the public announcement of medium-term numerical targets for inflation, with an institutional commitment by the monetary authority to these targets. Additional key features include increased communication with the public and the markets about the plans and objectives of monetary policymakers and increased accountability of central bank for its inflation objectives. Monetary policy decisions are guided by the deviation forecasts of future inflation from the announced inflation target, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy.

The country has no explicitly stated nominal anchor, b rather monitors various indicators in conducting monetary policy. This is also used when no nt information on the country is available.

http://www.imf.org/external/np/mfd/er/2008/eng/0408.htm

4. Exchange rates regimes

De Facto Classification of Exchange Rate Regimes and Monetary Policy Frameworks

Exchange rate anchor

Monetary aggregate target

Inflation targeting framework

Other

-6-(Source: World Economic Outlook, IMF, April 2009)

Figure 2-3: External Developments (Index, 2000 = 100, three-month moving average, unless otherwise noted)

-7-

(Source: World Economic Outlook, IMF, April 2009)

Figure 2-4: Foreign Exchange Exposure isStrongly Linked to Market Perceived DefaultRisk, Regardless of the ER Regime

-8-

Source: Bundesbank (Exchange rates on the Frankfurt exchange)

The exchange rate of the Deutschemark againt the US dollar and the French Franc – 1953 - 1998

0

0,5

1

1,5

2

2,5

3

3,5

4

4,519

53

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

0

10

20

30

40

50

60

70

80

90

USD

1 =

DE

M...

FR

F 1

00 =

DE

M...

-9-

Source: Bundesbank (Exchange rates on the Frankfurt exchange)

The annual rate of appreciation of the Deutschemark ag nst the US dollar and the French Franc – 1954 – 1998

-30

-20

-10

0

10

20

30

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

USD 1 = DEM …

FRF 100 = DEM …

-10-

Source: Bundesbank

Annual rate o f appre ciation o f the e uro agains t the Br tis h Pound and the US Do llar (% increas e)

-15

-10

-5

0

5

10

15

20

25

200820072006200520042003200220012000

GBP

USD

-11-

Source: WEO, April 2009

Implied PPP

0

0,2

0,4

0,6

0,8

1

1,2

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

FRA

DEU

GBR

-12-

Effec tive exchange rate 1995-2009 OECD

80

90

100

110

120

130

140

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

France

Germany

United Kingdom

United States

Euro area