Question: The chief financial officer (CFO) has noticed news about China and its unwillingness to let its currency, the yuan, float freely in foreign exchange markets. He has been wondering if other countries might do the same thing for similar reasons. Because this could have a profound impact on the new globalization strategy that the chief executive officer (CEO) has launched, he asked you to write a report for him that covers the following topics:
- Give a brief history of the foreign exchange systems, beginning with the gold standard up to today's current exchange rate system.
- This must be more than just a chronological list. It must explain the reasons for the evolution in the exchange rate system.
- What were the specific reasons why the gold standard was eliminated?
- How does a floating exchange rate system work?
- What is managed float or a managed floating exchange rate system?
- What happens when a country's central government intervenes in the exchange markets? What does it do, and why?
- What does the phrase pegging a currency to the dollar mean? Give a real-life example. Why would a country's central bank choose to do this?
- What are some advantages to a firm issuing Eurobonds to raise debt capital as opposed to normal bonds that are sold in a country and are denominated in the selling country's currency?