International finance Essay Example | Topics and Well Written Essays - 2000 words

International finance - Essay Example In fact, the creation of International Bank for Reconstruction and Development (IBRD) as well as the International Monetary Fund (IMF), had both been the consequences of the conference. The innate characteristics of the conference had been – Firstly, the conference stressed upon the fixation of upper and lower limits for the exchange rates of any domestic currency. Such a system would help in reducing possibilities of financial distress owing to fluctuations in the rate of exchange. The upper and lower limits of the rate of exchange are on the other hand, made the domain of the national government with regard to their respective current account positions. To be precise, the domestic governments were allowed to make adjustments to up to 10% below or above the pegged rates of exchange. The domestic currency of any nation was made completely convertible with any other currency to ease foreign trade. Lastly, all nations were made members to the International Monetary Fund so as to make the latter’s task easier to conduct at times when a financial crisis takes place. The system collapsed during 1970s, though that did not mean that the whole world converted itself into a system of floating exchange rates. For instance, the nations underlying European Union follow a fixed exchange rate regime where they maintain a fixed rate of exchange with the Euro as well as between themselves (Alderman, 2011, ‘Europe’s Challenge: Fostering Growth Amid Austerity’). Answer to Question 2 According to the concept of uncovered interest rate parity (UIP), the difference between the rates of returns on domestic and foreign bonds must be equal to the expected change in the rate of exchange