International Finance Dr.

Angela Ng
FINA 342 HKUST
Class Notes 3
INTERNATIONAL MONETARY SYSTEMS
Definition: International monetary system refers to the set of
olicies! instit"tions! ractices! reg"lations! an#
mechanisms that #etermine the rate at $hich one
c"rrency is e%change# for another.
I. ALTERNATIVE EXCHANGE RATE SYSTEMS
F&'ATIN( )AT* S+ST*,S
*%change rates are #etermine# -y the interaction of c"rrency
#eman# an# s"ly! $itho"t #irect inter.ention -y
go.ernment a"thorities.
As e%change rates change contin"o"sly! it is #iffic"lt to /no$
ho$ m"ch a f"t"re foreign c"rrency cash flo$ $ill -e $orth.
0hat infl"ences the s"ly an# #eman# for foreign
c"rrencies1
1
,ANA(*D F&'AT S+ST*,S
,any co"ntries! s"ch as the U.S. an# 2aan! $ith floating
c"rrencies ha.e attemte#! .ia central -an/ inter.ention! to
smooth o"t e%change rate fl"ct"ations. S"ch a system of
manage# e%change rates is calle# a manage# float.
Three categories of central -an/ inter.ention:
3. Short4term: Smoothing o"t #aily fl"ct"ations
2. Interme#iate4term: 5&eaning against the $in#5
3. Unofficial egging
TA)(*T 6'N* A))AN(*,*NT
*%change rates are maintaine# $ithin a secific margin
aro"n# agree#4"on! fi%e# central e%change rates.
*"roean ,onetary System 7*,S8
The *,S -egan oerating in ,arch 39:9. Its "rose is to
foster monetary sta-ility in the *"roean ;omm"nity
7*;8.
*"roean ;"rrency Unit 7*;U8
A c"rrency "nit $hich is a $eighte# a.erage of a fi%e#
amo"nts of c"rrencies in the region. The $eights are
#etermine# -y the relati.e strengths of each co"ntry.
< The *;U f"nctione# as a "nit of acco"nt! as a means of
settlement! an# as a reser.e asset for the mem-ers of the
*,S.
2
*%change )ate ,echanism 7*),8
< *ach c"rrency has an agree# "on central rate
#enominate# in *;U. The central rate can -e a#="ste#
"n#er aroriate circ"mstances.
< >ilateral cross4rates are #etermine# from the central
rates.
< ;entral -an/s try to limit e%change rate fl"ct"ations
aro"n# the central rates.
*;U to *U)' 7?8
< 'n 2an"ary 3! 3999! the mem-er states of the *U
initiate# the *"roean ,onetary Unification 7*,U8!
the esta-lishment of a single c"rrency for *"roe.
< *"ro notes an# coins $ill not -egin to circ"late "ntil
2an"ary 3! 2@@2.
< From 2an"ary 3 "ntil 2"ly 3! 2@@2! e"ro c"rrency $ill
circ"late =ointly $ith national monies an# -oth may -e
"se# for cash transactions. After 2"ly 3! 2@@2 the
national monies $ill no longer -e a legal ten#er an#
only e"ros may -e "se#.
0hat ha.e $e learne# from the *,S! regar#ing the
ro-lems that a target4Aone system is li/ely to enco"nter1
< ,aintenance of a target4Aone arrangement reB"ires
close coor#ination of macroeconomic olicies.
3
FIC*D )AT* S+ST*,S
;entral -an/s m"st -"y or sell the c"rrency in or#er to
maintain the e%change rate at a #etermine# le.el 7in ractice!
$ithin a narro$ re4#etermine# range8.
0hen $ill a central -an/ -"y foreign e%change1
If fi%e# e%change rates can -e maintaine#! these systems are
attracti.e -eca"se the .al"e of foreign c"rrency cash flo$ is
/no$n.
Dro-lems
Fi%e# rates forge a #irect lin/ -et$een #omestic an#
foreign inflation rates.
0hen e%change rate corrections arri.e! they are "s"ally
large.
0hen the go.ernment cannot s"stain the fi%e# rates! the
c"rrency is either #e.al"e# or re.al"e#.
De.al"ation of a c"rrency! in its narro$ an# semantically
correct sense! refers to a #ro in the foreign e%change
.al"e of a c"rrency that is egge# to gol# or to another
c"rrency. In other $or#s! the ar .al"e is re#"ce#. The
oosite of #e.al"ation is re.al"ation.
4
Fi%e# .ers"s Fle%i-le e%change rates
The /ey arg"ments for fle%i-le e%change rates rest on 7i8
easier e%ternal a#="stments an# 7ii8 national olicy
a"tonomy.
< As long as the e%change rate is allo$e# to -e
#etermine# accor#ing to mar/et forces! e%ternal -alance
$ill -e achie.e# a"tomatically.
< 0ith fle%i-le e%change rates! go.ernment can "se its
monetary an# fiscal olicies to "rs"e $hate.er
economic goals it chooses. Un#er a fi%e# rate regime!
the go.ernment may ha.e to ta/e contractionary
7e%ansionary8 monetary an# fiscal olicies to correct
the >'D #eficit 7s"rl"s8 at the e%isting e%change rate.
A ossi-le #ra$-ac/ of a fle%i-le e%change rate regime is
that e%change rate "ncertainty may hamer international
tra#e an# in.estment! $hereas fi%e# rates ro.i#e sta-ility
in international rices for the con#"ct of tra#e.
A Egoo#F 7or i#eal8 international monetary system sho"l#
ro.i#e 7i8 liB"i#ity! 7ii8 a#="stment! an# 7iii8 confi#ence.
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II. HISTORY OF THE INTERNATIONAL MONETARY
SYSTEMS
>)*TT'N 0''DS A()**,*NT
>retton 0oo#s $as name# after the site at $hich it too/
lace. The agreement laste# from 394G "ntil 39:3.
Un#er the >retton 0oo#s System! the U.S. #ollar $as
con.erti-le into gol# at H3IJo"nce.
'ther c"rrencies $ere egge# to the USH or gol#.
*%amle: The (erman D, $as set eB"al to 3J34@
th
of an
o"nce of gol#! or a-o"t H@.2I.
Un#er this form of gol# e%change stan#ar#! only the U.S.
#ollars $ere con.erti-le into gol# at the official ar .al"e.
'ther mem-er nations $ere not reB"ire# to e%change their
c"rrency for gol#! -"t le#ge# to inter.ene in the c"rrency
mar/ets if their c"rrency mo.e# more than 3K from its
official rate.
The >retton 0oo#s conference create# t$o $ell4/no$n
instit"tions to imlement this fi%e#4rate system. They are the
International ,onetary F"n# 7I,F8 an# the 0orl# >an/.
6
D'ST >)*TT'N 0''DS 7*%hi-it 3.38
After the 39:34:4 'il ;risis 72:@433@ LJH8
US: High inflation! stagnant economy.
(ro$ing go.ernment -"#get #eficit.
;"rrent acco"nt #eficit.
2aan: High inflation rate! -"t fell B"ic/ly.
;"rrent acco"nt s"rl"s starts to increase #"e to
$ea/ yen.
39::4:M 72G@423@ LJH8
US: Fe# s$itche# its olicy to sta-iliAing money s"ly than
interest rates. (ro$ing go.ernment #eficit lea#s to
higher interest rates.
39:M4M3 7aro"n# 22@42I@ LJH8
)eaganomics: &o$er inflation an# high interest rates.
;aital inflo$ #"e to high interest rates an#
strong #ollar.
2aan: ,ore c"rrent acco"nt s"rl"s #"e to the strong #ollar
7chea yen8.
39MI4M: 72I@ to 32@ LJH8
US: Stagnant economy an# the sin/ing #ollar. Slo$ gro$th
relati.e to other economies.
(o.ernment #eficit.
2aan: Derio# of a -"--le < High yen! high stoc/ mar/et! high
interest rates
7
39MM49@ 732@43I@ LJH8! 399@494 733@43@@ LJH8! 399I 73@@4M@
LJH8
2aan: >"rst of the -"--le! stagnant economy! e.en higher
yen.
399G: >ac/ to aro"n# 3@@L! an# H " to 32@L in 2an"ary 399:
an# 34GL in 2"ne 399M.
8
III. THE INTERNATIONAL MONETARY FUND
The I,F is the /ey instit"tion in the c"rrent international
monetary system.
The I,F $as create# to a#minister a co#e of fair e%change
ractices an# ro.i#e comensatory financial assistance to
mem-er co"ntries $ith >'D #iffic"lties.
,em-ershi an# B"otas
To carry o"t its tas/! the I,F $as originally f"n#e# -y
each mem-er s"-scri-ing to a B"ota -ase# on e%ecte#
ost40orl# 0ar II tra#e atterns.
)elati.e siAe of B"otas is imortant as a #eterminant of
.oting o$er. The in#"strialiAe# co"ntries ha.e al$ays
maintaine# .oting control -eca"se they s"ly most of the
B"otas.
In a##ition to its B"ota reso"rces! the I,F has access
"n#er certain circ"mstances to f"n#s that it -orro$s in the
$orl#Ns caital mar/ets.
Secial Dra$ing )ights
The SD) is an international reser.e asset create# -y the
I,F to s"lement e%isting foreign e%change reser.es.
Define# initially in terms of a fi%e# B"antity of gol#! the
SD) has -een re#efine# se.eral times. It is c"rrently the
$eighte# .al"e of c"rrencies of the fi.e I,F mem-ers
ha.ing the largest e%orts of goo#s an# ser.ices.
In#i.i#"al co"ntries hol# SD)s in the form of #eosits in
the I,F. These hol#ings are art of each co"ntryNs
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international monetary reser.es.
10
IV. THE CASE OF HONG KONG
A fi%e# e%change rate system against the US #ollar! at
USH3OHKH:.M@! esta-lishe# in 39M3.
;U))*N;+ >'A)D S+ST*,
Definition: A c"rrency -oar# is a system aime# at
esta-lishing a fi%e# e%change rate -et$een the #omestic
c"rrency an# an e%ternal c"rrency. A c"rrency -oar# fi%es its
e%change rate -y ma/ing a commitment to e%change
#omestic c"rrency for foreign c"rrency at a re4secifie# rate.
&ocal c"rrency in circ"lation! therefore! nee#s to -e at least
3@@K -ac/e# -y foreign reser.es. &ocal notes are iss"e# only
$hen there is a #eman# for foreign e%change to -e con.erte#
into the local c"rrency.
;> reser.es are in.este# in lo$4ris/ assets mainly
#enominate# in the reser.e c"rrency! earning interest.
Un#er a tra#itional c"rrency -oar# system! interest rates -ear
the -"r#en of a#="sting to mar/et forces. The monetary -ase
is comletely fle%i-le.
A caital o"tflo$ 7$hich "shes #o$n the .al"e of a floating
#omestic c"rrency8 ca"ses a contraction in the money s"ly
an# "shes " interest rates. Higher interest rates! in t"rn!
in#"ce caital inflo$! re.ersing the original o"tflo$! an#
sta-iliAing the e%change rate.
The ossi-ilities of ar-itrage imly that interest rates $o"l#
not ersistently #e.iate m"ch from those alica-le to the
reser.e c"rrency.
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;"rrency Attac/:
In the case of a c"rrency attac/! the monetary -ase $ill ha.e
to shrin/ "n#er the c"rrency -oar# system an# may easily
lea# a liB"i#ity cr"nch 7of local c"rrency8 an# -an/ing crisis.
This haene# in Argentina in 399I. >"t Argentina $as a-le
to hol# onto the eg to the USH.
TH* H'N( K'N( ;U))*N;+ >'A)D
HK #ollar is f"lly -ac/e# -y the US #ollar.
P)eser.e USH hel# -y the Hong Kong ,onetary A"thorityQ
R P Dromise# e%change rate HKH:.M@JUSHQ
O P&e.el of monetary -ase in HKHQ
0ith a c"rrency -oar# system! HK,A ne.er r"ns o"t of
foreign c"rrency! e.en if e.eryone $ho hel# HKH $ante# to
con.ert to USH! i.e.! a c"rrency attac/. Th"s! it is easy to
a.oi# c"rrency #e.al"ation.
In fact! HK (o.ernment has far more US #ollar asset than the
HKH monetary -ase con.erte# to USH. The USH asset is
technically manage# -y the Exchange Fund.
0hen the note4iss"ing -an/s 7NI>s8 nee# to iss"e HKH notes!
they s"-mit US #ollars to the *%change F"n# 7*F8 in ret"rn
for non-interest-bearing Certificates of Indebtedness 7;Is8 at
the fi%e# rate of HKH:.M@:USH3.
12
To#ay! $e ha.e more #e.eloe# an# E#eeF monetary
systems! so that c"rrency in circ"lation no longer means
money s"ly! an# it is the inter-an/ -alance! not the total
money s"ly! that #etermines interest rates.
,o#ern c"rrency -oar#s reB"ire the inter-an/ clearing
-alance to -e -ac/e# -y foreign e%change reser.es in
a##ition to the stoc/ of c"rrency in circ"lation.
;aital o"tflo$ 7#o$n$ar# ress"re on HKH8 > i
caital inflo$ 7HKH strengthens8
;aital inflo$ 7"$ar# ress"re on HKH8 > i
caital o"tflo$ 7HKH $ea/ens8
>efore 39MM: Hong/ong>an/ ha# all the controlS
The Hong/ong>an/ 7HK>8 ass"me# the role of clearing
ho"se for all commercial -an/s. Inter-an/ ayments $ere
settle# at the en# of each $or/ing #ay at the HK>.
The settlement system $as characteriAe# -y a three4tiere#
str"ct"re:
7i8 ,anagement >an/ of the ;learing Ho"se of the Hong
Kong Association of >an/s! HK>T
7ii8 3@ Settlement >an/sT an#
7iii8 3I9 S"-settlement >an/s.
*ach -an/ /et a non4interest -earing clearing acco"nt
$ith a resecti.e -an/ one le.el " the hierarchy. Negati.e
-alances $ere enaliAe#.
The HK> ha# the "niB"e a-ility to infl"ence the inter-an/
mar/et an#! in t"rn! interest rates.
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2"ly 39MM: Acco"nting Arrangements
The EAcco"nting ArrangementsF agree# -et$een the *F
an# the HK> reB"ire# HK> to maintain a EBalanceF $ith
the *F! eB"i.alent to that of its net clearing balance
7N;>8 < the net amo"nt of f"n#s that all other -an/s lace
$ith it.
The E>alanceF is non4interest -earing an# reresents a
le.el of inter-an/ liB"i#ity.
N;> U >alance HK> ays enalty interest to the *F.
N;> V >alance There is an oort"nity cost to HK>.
The Acco"nting Agreements transferre# control o.er
inter-an/ liB"i#ity from the HK> to the *F.
Note: A small oen economy $ith a fi%e# e%change rate
cannot ha.e an in#een#ent monetary olicy. HKNs money
s"ly is #etermine# -y its -alance of ayments. The *F
can infl"ence inter-an/ liB"i#ity an# interest rates! -"t not
the money s"ly.
,arch 399@: *%change F"n# >ills
The *F -egan iss"ing short4term EF Bills in ,arch 399@
an# EF Notes in ,ay 3993! as instr"ments for -an/s to
manage their liB"i#ity.
>an/s enter into s$a or re"rchase agreements $ith the
*F to o-tain HKH liB"i#ity $hen nee#e#.
The >ills an# Notes #o not e%ist as hysical sec"rities -"t
only as -oo/ entries. All transactions are aerless.
14
2"ne 3992: &iB"i#ity A#="stment Facility 7&AF8
The &AF! HKNs .ersion of a #isco"nt $in#o$! oerate#
#aily after the close of the HKH inter-an/ mar/et.
'.ernight liB"i#ity assistance co"l# -e o-taine# thro"gh
entering overnight repo (repurchase agreements) of
eligi-le sec"rities.
If -an/s ha# s"rl"s f"n#s in their settlement acco"nts
7$hich #o not earn any interest8! they ha# the incenti.e to
len# the f"n#s to the HK,A thro"gh the &AF at the &AF
>i# )ate 7$hich stoo# at 4K ="st -efore it $as a-olishe#
in Setem-er 399M8.
'ther -an/s that fo"n# themsel.es $ith a negati.e
-alance! co"l# -orro$ at the &AF 'ffer )ate 7:K "ntil
Setem-er 399M8.
The &AF >i# an# 'ffer )ates $ere the -enchmar/ interest
rates! an# $ere /et close to the US Fe#eral F"n#s )ate.
In theory! HKNs o.ernight HI>') sho"l# stay $ithin the
&AF >i# an# 'ffer )ates.
Aril 3993: The *sta-lishment of the HK,A
The HK,A $as formally esta-lishe# on Aril 3! 3993!
merging the 'ffice of the *%change F"n# 7resonsi-le for the
management of foreign e%change reser.es8! the ,onetary
Affairs >ranch of the (o.ernment an# the 'ffice of the
;ommissioner of >an/ing.
15
Decem-er 399G: Imlementation of the )T(S System
The Real ime !ross "ettlement 7)T(S8 system $as "t in
lace in Decem-er 399G.
Inter-an/ clearing s$itche# from HK> to the Hong/ong
Inter-an/ ;learing &imite# 7HKI;8 "n#er the HK,A.
*ach of the 3:I license# commercial -an/s no$ /ees a
clearing acco"nt $ith the HKI;. Transactions are settle#
gross an# real4time. These 7non4interest -earing8 clearing
acco"nts constit"te the aggregate balance of settlement
accounts.
Un#er the )T(S system! each transaction -et$een t$o
license# -an/s nee#s to -e a#eB"ately f"n#e# rior to
settlement. No negati.e settlement -alance is allo$e# at
any time for any -an/.
Intra#ay liB"i#ity can -e o-taine# thro"gh con#"cting
intrada# repos of eligi-le sec"rities $ith the HK,A.
These intra#ay loans! -y #efinition! m"st -e reai# -y the
en# of the $or/ing #ay.
Setem-er 399M: Se.en4Doint ,eas"res
Follo$ing a erio# of freB"ent sec"lati.e attac/s on the
HKH! the HK,A "n.eile# ma=or changes to the monetary
system on Setem-er I! 399M. The aim $as to strengthen
the c"rrency -oar# arrangement an# restore confi#ence in
the lin/e# e%change rate.
16
Se.en Technical ,eas"res
3. Convertibilit#: The HK,A has e%ten#e# the
con.erti-ility "n#erta/ing -y the c"rrency -oar# from
only c"rrency in circ"lation 7at HKH:.M@:USH38 to
incl"#e commercial -an/sN clearing -alances 7at
HKH:.:I:USH38.
Ho$e.er! the HK,A #oes not g"arantee con.ersion for
-an/s for f"n#s from USH to HKH at a fi%e# rate. It!
th"s! remains the -an/sN resonsi-ility to ens"re that
there are s"fficient HKH in the clearing acco"nts "on
settlement.
2. >i# )ate of the &AF is remo.e#. >an/s $ill! therefore!
no longer #eosit f"n#s $ith the HK,A o.ernight an#
$ill see/ to len# o"t all their f"n#s #"ring the #ay in the
inter-an/ mar/et.
3. The &AF is rename# the $iscount %indo& 7D08. The
&AF 'ffer )ate is rename# the Base Rate 7>)8 -ase#
on $hich #isco"nt rates for "se in o.ernight reos are
calc"late#.
The >) $ill -e anno"nce# each morning -efore the
mar/et oens. Initially! the >) $ill -e the a.erage of
the o.ernight an# 34month HI>') of the re.io"s #ay.
*.ent"ally! a metho#ology $ill -e #e.eloe# so as to
ma/e >) #etermination transarent an# a"tomatic.
17
4. >an/s are gi.en greater access to #ay4en# liB"i#ity
thro"gh reos at the D0 "sing *F aer! $hich is f"lly
-ac/e# -y the foreign e%change reser.es.
The restriction that #isco"rages Ereeate# -orro$ingF
thro"gh enal interest rates is remo.e#! $hich
effecti.ely ma/es *F aer f"lly transfera-le $ith
clearing -alances.
I. Ne$ *F aer $ill only -e iss"e# "on foreign caital
inflo$! so as to ma/e the -ac/ing more cre#i-le. 7As at
the en# of A"g"st! foreign e%change reser.es! incl"#ing
"nsettle# contracts! still reresente# 3.G times the
enlarge# monetary -ase.8
G. The first half of each license# -an/Ns *F aer hol#ings
$ill -e #isco"nte# at >)! an# the ne%t half $ill -e
#isco"nte# at >)WIK or o.ernight HI>')! $hiche.er
is higher.
:. 0ith regar# to e%isting eligi-le aers for &AF
#isco"nting! AAA4rate# aer an# Secifie#
Instr"ments $ill follo$ the #isco"nt rate sche#"le
o"tline# in ,eas"re G! $hile other eligi-le aers $ill
-e #isco"nte# at a 2I- remi"m. The reeate#
-orro$ing enalty contin"es to aly to instr"ments
other than *F aer. No ne$ iss"es of aer other than
*F aer $ill -e eligi-le at the D0.
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Three Doints to Note
3. A license# -an/! if ercei.e# to -e a-"sing the D0 in
an attemt to Efacilitate mani"lation that may
#esta-iliAe the c"rrency or money mar/etsF! can -e
#enie# access to the D0.
2. The HK,A is resonsi-le for managing the fiscal
reser.es an# $ill remain acti.e in the foreign e%change
an# money mar/ets in resonse to the nee# to ro.i#e
f"n#ing for the -"#get #eficit.
3. The HK,A remains alert to e%treme con#itions in the
inter-an/ mar/et an# reser.es the right to len# an#
-orro$ in the mar/et to #amen these con#itions.
0hat are the ma=or effects of the Se.en4Doint ,eas"res1
19
SD*;U&ATIX* ATTA;KS 'N TH* HK D'&&A)
An *%amle:
Ass"me a c"rrent e%change rate of HKH:.:I:USH3.
A c"stomer of >an/ A sells HKH:.:I -illion -y instr"cting
the -an/ to #e-it his HKH acco"nt -y HKH:.:I -illion an#
cre#it his USH acco"nt -y USH3 -illion.
Any -an/! facing this artic"lar c"stomer instr"ction!
$o"l# not maintain s"ch a large c"rrency mismatch
-et$een its assets an# lia-ilities an# hence $o"l# see/ to
sB"are its osition -y selling HKH in the foreign e%change
mar/et in e%change for USH.
If the sale of HKH is so large that there are not eno"gh
-"yers to a-sor- them all! the HK,A $ill -ecome the
resi#"al -"yer.
The instit"tion that >an/ A sells HKH in the foreign
e%change mar/et $ill ha.e to #eli.er the s"m of HKH in
t$o #aysN time.
0hat $o"l# haen to the interest rates1 0hy1
20
The ,e%ican ;risis: 2an"ary 399I 7*%hi-it 3.28
Desite a -alance# -"#get inflation of 2:K 7.ers"s 3I@K
in 39M:8! ,e%ico ha# t$o ro-lems:
3. Foreign c"rrency reser.es fell from H3@ -illion in early
3994 to only HI -illion -y No.em-er 3994 as the
go.ernment egge# the eso at artificially high le.els.
2. ;ommercial -an/s an# the go.ernment ha# rolle# o.er
H23 -illion of short4term eso #e-t into similar short4
term tesebonos $hose rincial $as in#e%e# to the
#ollar. These o-ligations rose $ith the .al"e of the
#ollar.
Decem-er 3994 4 2an"ary 399I: Deso fell I@K against the
#ollar! #o"-ling the eso .al"e of ,e%icoNs tese-ono
o-ligations.
,e%icoNs eso crisis $as se.ere -"t relati.ely short4li.e#.
D"ring the ,e%ican eso crisis in 2an"ary 399I! the HKH
came "n#er a sec"lati.e attac/ an# #ereciate# from
HKH:.:3:I:USH3 at the -eginning of the year to
HKH:.::2I:USH3 on 2an"ary 32.
The Asian Financial ;risis: 'cto-er 399: 7*%hi-it 3.38
Thailan# fell first! $ith ro-lems that resem-le# ,e%icoNs.
&i/e Thailan#! In#onesia an# Korea s"ffere# from fi%e#
e%change rates! large c"rrent acco"nt #eficits! large
amo"nts of short4term foreign c"rrency #e-t "se# to
s"ort sec"lati.e roerty .ent"res! an# #eclining
cometiti.eness.
21
Hong Kong:
Selling ress"re on HKH intensifie# on 'cto-er 23!
follo$ing the #e.al"ation of the NT #ollar. The HK,A
a-sor-e# a s"-stantial amo"nt of HKH on 'cto-er 23! to
-e settle# on 'cto-er 23 7>lac/ Th"rs#ay8.
'n Th"rs#ay morning! the aggregate -alance totale# HKH2
-illion -"t as m"ch as HKHG -illion $as #"e to -e settle#
on that #ay. This $as the amo"nt that -an/s sol# to the
c"rrency -oar# on -ehalf of their c"stomers on T"es#ay.
In the face of this ac"te shortage of HKH liB"i#ity an# in
fear of -eing enaliAe# for reeate#ly "sing the &AF!
-an/s -i# aggressi.ely in the inter-an/ mar/et for HKH
f"n#s #"ring the morning of 'cto-er 23. '.ernight
HI>') shot " to nearly 3@@K ="st -efore noon.
In the en#! HKH $ere -o"ght -ac/ from the HK,A! some
for early settlement. The #eman# for HKH #ro.e the
e%change rate as high as HKH:.I@:USH3 in the afternoon.
The HKH that $ere -o"ght $ere #"e for settlement "ntil
the follo$ing ,on#ay 7'cto-er 2:8 so -an/s en#e# "
ha.ing to -orro$ HKH at .ery high inter-an/ rates to
co.er their ositions o.er the $ee/en#.

22
Exh!t 3."
Nominal Xal"e of the USH "n#er Floating )ates! 39G34399I
23
Exh!t 3.#
,e%ican Deso ;risis
Exh!t 3.3
Asian ;ontagion
7Decem-er 33! 399G O 3.@@8
24
3.@
@.2
@.4
@.G
@.M
3.2
3994 399I
,e%ican stoc/ mar/et .al"e! in eso
7Decem-er 33! 3993 O 3.@@8
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1996 1998 1997
Thai -hat
Korean $on
In#onesian r"iah