This paper examines the implications of the growth and integration of international capital markets for the management of exchange rates, with particular attention to the inferences that can be drawn from the currency turmoil that shook the European Monetary System (EMS) last fall and winter. The resources available to the private sector for taking positions in the forex market are now much larger than even those of the Group of Ten central banks. When private markets, led by the increasing financial muscle of institutional investors, reach the concerted view (rightly or wrongly) that the risk/return outlook for a particular currency has deteriorated significantly, the defending central bank could be faced with a run that could easily amount to, say, $100–200 billion or more within a week. The range of private market participants involved in last fall’s crisis in European currency markets was broad—encompassing banks, securities houses, institutional investors, hedge funds, and corporations. However that wide participation explains in part why the funds that flooded into central banks were so massive.
6. Ask-Bid Spread on Interbank Rates with Various Maturities, September-October 1992
7. Ask-Bid Spread on Spot Exchange Rates Against U.S. Dollar, September-October 1992
8. One-Month Forward Exchange Rates Against Deutsche Mark, August-November 1992
9. Three-Month Forward Exchange Rates Against Deutsche Mark, August-November 1992
10. Volumes of Selected Financial Futures Contracts Traded, August-October 1992
11. Margin Requirements for Speculators and Hedgers/Members
The following symbols have been used throughout this paper:
… to indicate that data are not available;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
- between years or months (e.g., 1991-92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
This report was prepared under the direction of Morris Goldstein, Deputy Director of the Research Department of the International Monetary Fund, together with David Folkerts-Landau, Chief of the Capital Markets and Financial Studies Division of the Research Department. The co-authors of the report are Peter Garber, Liliana Rojas-Suárez, and Michael Spencer.
This year’s capital markets report is divided into two parts. Part I examines the implications of the growth and integration of international capital markets for exchange rate management. Part II of the report—to be published later this year—will focus on sources of systemic risk in the international financial system. This report was prepared in connection with the annual surveillance of international capital markets conducted by the Research Department of the International Monetary Fund. It draws, in part, on a series of informal discussions with commercial and investment banks, securities houses, stock and futures exchanges, regulatory and monetary authorities, and the staffs of the Bank for International Settlements, the Commission of the European Communities, the Organization for Economic Cooperation and Development, and the Japan Center for International Finance. These discussions took place in Belgium, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Singapore, Switzerland, the United Kingdom, and the United States between October and early December 1992.
In addition to the authors, other Fund staff members taking part in some of the discussions or making substantive contributions to the study at various stages included Robert Flood, Steven Fries, Zuliu Hu, and Tim Lane of the Research Department, Charles Collyns, Robert Rennhack, and Philippe Szymczak of the Policy Development and Review Department, and Steven Weisbrod, consultant. Kellett W. Hannah and Subramanian S. Sriram prepared the data presented in the report. Norma Alvarado, Maria Orihuela, and Janet Strain provided expert word processing assistance. Elin Knotter of the External Relations Department edited the manuscript and coordinated the production of the publication.
The study has benefited from comments by staff in other departments of the Fund and by members of the Executive Board. Opinions expressed, however, are those of the authors and do not necessarily represent the views of the Fund or of the Executive Directors.
Deutsche Bundesbank, “The Latest Exchange Rate Realignments in the European Monetary System and the Interest Rate Policy Decisions of the Bundesbank,”Monthly Report of the Deutsche Bundesbank, Vol. 44, No. 10 (October1992).
Deutsche Bundesbank, “The Latest Exchange Rate Realignments in the European Monetary System and the Interest Rate Policy Decisions of the Bundesbank,”Monthly Report of the Deutsche Bundesbank, Vol. 44, No. 10 (October1992).)| false