Filter
RSS

Blog

What are futures?

 

Mirror mirror on the wall, will Nifty jump or have a great fall? If only we had such a mirror that could tell us where a stock or market is headed! But only 2 people can tell where the market is headed. One is God and the other is a liar. We can only build predictions in this regard and take positions accordingly. But how can we do so and earn good money out of it? For that, we have a derivative instrument called Futures. So, let’s understand the world of Futures!

What are Futures?
A futures or futures contract is a financial contract between a buyer and a seller, who enter into the contract based on his/her view on an asset’s future price movement. It is a legally binding derivative contract to buy or sell an asset at a predetermined price on a future date. Hence, the name Futures. Two major features of futures contracts are that they are standardized and exchange-traded. Due to these reasons, they are often preferred over forward contracts by traders. We can say that futures are an extended or a better version of forwards. These important features protect a trader from various risks like liquidity risk, counterparty risk, etc. Futures are usually used by speculators and hedgers. You might recall these terms from our previous blog.

Following the definition of derivatives, even futures contract derives their value from an underlying asset’s spot price. The spot price is nothing but the price at which an asset is currently trading in the cash market. For example, the ACC Ltd. Futures contract will derive its value from the stock price of ACC i.e. its spot price.

Lectures
How does it work?
Well, in a futures contract, both the buyer and the seller are obliged to fulfil the contract's specifications. The buyer of the contract is of the view that the price of an underlying will rise in near future and the seller has the opposite view. So, when both parties enter into a futures contract, the buyer must buy and accept the underlying asset whereas the seller must sell and deliver it on the expiry of the contract. Therefore, if the spot price of an asset goes up, the buyer wins and if it goes down the seller wins. And that’s how a futures contract work. I hope all of this is crystal clear. Now let’s level up a little and understand some contract specifications about futures.

Futures contract specifications

a. Lot size
By now you already know that futures are standardized contracts as they are exchange-traded. This means that everything in the contract is pre-specified by the exchanges. One such specification is the lot size of the contract. The lot size is nothing but the minimum quantity of the underlying asset you need to buy in order to enter into a futures contract. This minimum quantity is called 1 lot. For example, the lot size for ACC is 500 shares whereas for Gold it is 1 Kg. Lot sizes can vary from asset to asset.

b. Contract value
The contract value is simply the product of the agreed lot size and price. For example, if you agree to buy 3 lots of ACC (500*3= 1500) at say spot price of Rs. 2,400/share, your contract value will be Rs. 36 Lakh.

c. Tick size
Tick size is the minimum difference between the different bids and offer prices. Bid price is buying price whereas offer price is the selling price of an asset. To put it simply, it is the minimum difference between the consecutive bid and offer prices. Right now, the tick size on NSE is Rs. 0.05. So, if we continue with the example of ACC, let’s assume the LTP (Last traded price) of ACC futures was 2410 then the bid prices would be 2409.95, 2409.90, 2409. 85, etc. and offer prices would be 2410.05, 2410.10, 2410.15, etc.

d. Expiry
Just like any other product has an expiry date, even a futures contract has one. Expiry is nothing but the date on which the contract ceases to exist. So, naturally, this is the last trading day of a contract. Any scrip trading in the futures market shall have three different expiries available for trading - the near month expiry (expiry in the current month), the mid-month (expiry in next month) and the far month expiry (expiry in the month after). These contracts expire on the last Thursday of every month. If the last Thursday is a national holiday, then the contract will expire on the previous trading day. On the expiry of the near month contract, the mid-month contract shall become the near month, the far month will become mid-month and the exchange will introduce a new far month contract, this cycle goes on.

Example

So, this is how an actual futures contract for ACC Limited looks like. The screenshot is taken on September 6, 2021, from the NSE website.
I am sure you already have started noticing the terms we discussed but let’s go through it together. First, observe that this is a Stock future under the instrument type heading. After that, you can check the expiry date of the contract i.e. 30th September 2021. On the orange highlighted row, the first price is the LTP of the futures contract- Rs. 2483.35, along with the previous day’s close and OHLC. In the table below that, you can see the market lot/lot size as 500 and the underlying value/ spot price at Rs. 2473.35. In the order book, you can see the best 5 bids and offer prices.

Bottomline
In the end, I would like to say that if you trade in F&O without proper knowledge, you will have no Future and you will be left with no Options. Just to revise quickly what we learned today, futures are standardized agreements wherein the parties to the contract agree to buy/sell the underlying at a pre-determined price on a pre-determined future date. The contract specifications are standardized and are decided by the exchange. Under contract specifications, we understood few key terms like lot size, contract value, tick size, and expiry. There are many other things which you need to know to learn about the Futures and I got you covered. If you want to learn about Futures and Options in the most fun, simplified and practical manner, make sure you check out my course here. I am sure you will love it. Until next time!
Zerodha
What are futures?
Read More
Types of future contracts

 

Till now we have learnt about what are derivatives, what are the types of derivatives and what are futures. Let’s revise it quickly. A derivative instrument is a contract between a buyer and a seller based on their views about an underlying assets’ future price movement. An underlying asset can be any financial instrument like stocks, bonds, commodities, currencies, interest rates and even indices. After that, we understood various types of derivatives like- Forwards, Swaps, Futures and Options. Then we took it up a notch with understanding Futures. But, as usual, ye dil mange more! That hunger for knowledge in us has not been fulfilled yet. So, in today’s blog, we will be discussing various types of futures. Let’s begin!


 

1. Commodity Futures

A commodity is anything that holds commercial value. In India, the various types of commodities being traded are Bullion, Agri, Energy, Base Metals. Commodity futures are contracts that derive their value from a commodity, bought and sold at a predetermined price in future. These contracts are usually preferred by producers or buyers to hedge against future price volatility. Some commodities like gold act as a hedge against inflation due to their low correlation with the stock market. In India, commodity futures are traded on Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX).

 

2. Currency Futures

As the name suggests, currency futures derive their value from the spot rate of a currency pair. A currency pair indicates the price of one currency that can be exchanged for another currency. These contracts allow you to buy or sell a currency at a fixed exchange rate at a future date. These futures are usually used to hedge against currency risk. For example, an importer importing raw materials from US may purchase USDINR futures to safeguard against rupee depreciation in future. In India, currency futures can be traded on NSE, BSE and MCX SX.

 

3. Interest Rate Futures

These are futures contracts based on interest-bearing debt instruments. The underlying debt instruments can be T-bills, Government bonds, etc. Interest rate futures is a contract between a buyer and a seller for the future delivery of a debt instrument at a predetermined price. These futures are usually used to hedge against interest rate risk. Due to the inverse relationship between interest rate and bond prices, the interest rate futures are also inversely related to the interest rates. In India, NSE and BSE offer interest rate futures
Research code

 

4. Stock Futures

This is where the real game starts! Stock future is a contract with an individual stock as an underlying. It is a contract to buy or sell a stock at a predetermined price and quantity at a future date. Usually, stock futures are used for speculation and/or hedging purposes. You may trade in stock futures on BSE and NSE. However, they are available only for a specified list of stocks that fulfil certain criteria as stated by the exchanges.

5. Index Futures

Now, what if you don’t want to trade in individual stock futures? No worries! We have Index futures as well. These futures will be contracts based on market indices like Nifty, Sensex, Bank Nifty etc. Traders use these contracts to speculate based on their directional views about the market. Many traders prefer index futures over stock futures, as the underlying index is a basket of stocks the risk is spread out amongst them. You may trade in index futures on BSE and NS

Closing thoughts

I hope now you have a basic introduction to various types of futures. Generally, speculators and hedgers are the participants in these markets. Yes, the profit potential in these instruments is substantial but so is the risk of losses. There are many other things that you need to know about Futures before you take your first trade and as usual, I have got you covered. If you want to learn about Futures and Options in the most fun, simplified and practical manner, check out my detailed course on Futures & Options here. I am sure you will love it. Until next time!
Zerodha
Types of future contracts
Read More
Inflation ate my maggi?

 

Do you remember the days when the 10 Rs. Maggi used to cater the evening snack of 2 people, and now it is hardly enough for one person…. or do you remember the size of 10 Rs. Parle-G biscuit packet some years back, wasn’t that plentiful! Now indeed it has reduced. This phenomenon that we have experienced is called “Shrinkflation”.

What is Shrinkflation?

Shrinkflation is a form of hidden Inflation, wherein producers now sell the product at same price but with reduced quantity. This term shrinkflation was first coined by British economist Pippa Malmgren in 2009.

What causes Shrinkflation:

Increased Production cost combined with intense competition:

Rising production costs are generally the primary cause of shrinkflation. Increase in the cost of raw materials, energy commodities and labour cost increases the production costs and subsequently they can diminish producer’s profit margins. Thus, in order to maintain the profit level, the producer has to either increase the price of product or offer reduced quantity at same price.

However, due to intense market competition on price level, there is threat to the producer of losing out on consumers if the prices are increased. For the sake of example let us say, both Cola & Pepsi are selling one bottle at Rs. 30 and you frequently buy Cola, but one day Cola increases price from 30 to 35, then wouldn’t your mind incline towards Pepsi?

Various studies have also found that the consumers are far less sensitive to quantity reductions than they are to price increases. Thus, many producers resort to “shrinkflation” than increasing the price of the product.

Indian Scenario:

In India, major industry players in the FMCG domain like Dabur, Hindustan Unilever, Nestle, Britannia, Coca Cola, Pepsi Co, P&G etc. have opted for Shrinkflation strategy. From snacks, chocolates, to bar soap, everything is undergoing ‘Shrinkflation.’

As per ET, Dabur has also reduced the quantity of certain products, to protect 5 and 10 rupee ‘sacred price points’, said Chief Executive Officer Mohit Malhotra.

Also, currently the 10 Rs. Vim bar soap weighs 135 grams as compared to 155 grams about three months ago, a Delhi-based distributor said. At the same price point, a pack of aloo bhujia, a popular crunchy and salty snack, made by Haldiram’s fell to 42 grams from 55 grams, as per ET.

Conclusion:

By adopting this strategy, even though seemingly there is no increased pinch to the pocket of consumers, the price per unit of weight or volume which the consumer pays for, increases.

Inflation ate my maggi?
Read More
Is silver ready to shine?

 

Introduction
As per a recent article of Business standard, Mutual Fund Houses have launched a clutch of new fund offers in the Silver ETF  (exchange traded fund) category this year and collected Rs 1,400 crore in assets.
But why all of sudden Mutual Fund Houses are coming with so many Silver ETF & Fund-of-Fund options, & investing in silver has become a bandwagon? well there are different reasons for that, lets understand them through a crisp analysis below!!

Silver as an Asset class:
Silver comes under the category of precious metal; thus, it has the use case of jewellery & investing, but apart from that, Silver has many use cases in Industry, because of its quality of having high electrical conductivity, high thermal conductivity, high reflectivity. Don’t let these science words bog you down, we are here to simplify things for you . Simply speaking silver is useful in preparation of new-age Batteries, Smart phones, Electric Vehicles, Water filters, Solar panels, medical applications like disinfectants, Mirrors, Coatings, etc.
These Industries are expected to be grow good & bring good demand for silver. And as per the economic equilibrium rule, increase in demand is expected to give increase in prices.

Regulatory Updates:
SEBI (Securities Exchange Board of India), the Market regulator has in November 2021, given permission for Silver ETFs, and that is a catalyst for so many Fund houses coming with ETFs & Fund-of-Fund in recent times.

Technical Analysis:


The Price of Silver is near to its support level at 61.8% retracement, this is one of the reasons why some Analyst believes that Silver is expected to have up move from here.

So, is it all rosy?
As every coin has two sides, there are opposing views too. As per past trends, it is seen that silver prices are affected by the value of the rupee against the dollar. Any decrease in the value of the dollar sees the demand for silver increase, & vice versa. And taking into consideration the Monetary tightening going on in USA, the value of USD is expected to appreciate against INR, in-turn pulling the value of silver to down.

Conclusion
Considering all the factors in mind, we can say that the commodity silver which is having good use cases in growing industries, is trading at its support level, which can give the Investor good risk-to-reward ratio.

Is silver ready to shine?
Read More
What is Digital Rupee?

A month after testing the wholesale central bank digital currency, the Reserve Bank of India (RBI) on Tuesday announced a trial for retail digital rupee (e₹-R) commencing on December 1 with four banks in as many cities participating in the pilot programme.

What is Digital Rupee?

CBDC is a legal tender that is issued in digital form by the central bank, as stated by the Reserve Bank. It is interchangeable 1:1 with the fiat currency and functions just like a sovereign currency.

The central bank defined its goals for the digital rupee in a "concept note" on Central Bank Digital Currency (CBDC). It also outlined the justification for creating a CBDC and how it will function as an alternative.

Classification of Digital rupee

Central bank Digital currency can be classified into two types:

1) Retail (CBDC-R): Retail CBDC would be potentially available for use by all.
2) Wholesale (CBDC-W):  is designed for restricted access to select financial institutions.

For the wholesale pilot project for the digital rupee which has rolled out on 1st November 2022, the RBI has chosen nine banks to take part. These include the Union Bank of IndiaState Bank of India, Bank of Baroda, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC.

The application of the wholesale digital rupee is for the settlement of transactions in government securities.

The Retail pilot project is going to get started on a trial basis from 1st December 2022. The program would cover selected locations in a closed user group (CUG) comprising participating customers and merchants and has identified eight banks for gradual participation. The first phase will begin with four banks including State Bank of India, ICICI bank, yes bank, and IDFC first bank, and would initially cover Mumbai, New Delhi, Bengaluru, and Bhubaneshwar.

How will the Digital rupee work?

The Digital rupee will be in the form of a digital token that represents legal tender. It would be issued in the same denominations that paper currency and coins are currently issued. Users can transact with E-rupee through a digital wallet offered by participating banks and stored on mobile phones. Digital rupee transactions can be both person-to-person and person to merchant. Payments to merchants could be made using QR codes displayed at merchant’s locations.

The advantage of Digital currency over existing digital payment systems is that payments through digital currency would be final, without requiring interbank settlement. Reducing operational costs associated with physical cash management, promoting financial inclusion, bringing resilience, efficiency, and innovation to the payments system, enhancing efficiency in the settlement system, and fostering innovation in cross-border payments are among the main drivers for considering the issuance of CBDC in India.

Future of Digital currency?

One of the main advantages for users is that the central bank's digital money would provide better anonymity than traditional digital transactions. India is a developing country with a number of digital payment options now, but this would give people even more choices. Currently, it is being done as a pilot, but once it reaches a certain critical mass, it will eventually become the next big thing in the payments arena. India is dedicated to building a digital payments ecosystem with innovations that realize the concept of "Ease of Living" and guarantee that social assistance benefits are provided to those who need it the most.

What is Digital Rupee?
Read More
International Trade Settlemment in Indian Rupees

 

The RBI established the rupee trade settlement mechanism in July 2022. The Mechanism is a way to do international business using rupees rather than dollars or other major currencies, with a focus on Indian exports, in order to foster the growing interest of the world trading community in the rupee.

The RBI's decision on rupee-denominated trade was made in an effort to decrease India's trade imbalance since it is easier for India to increase its share of Russian oil purchases at lower rates.

Dollar-strapped Sri Lanka and Sanctions hit Russia are going to be the first nations to utilize the Indian Rupee Trade Settlement Mechanism.

What Does this mean for India?

As the world's reserve currency, the dollar is used to settle the majority of import and export transactions.

Let’s say an Indian buyer enters into a transaction with France then the Indian buyer must exchange his rupees for US dollars first. These dollars will be sent to the vendor, who will then exchange them for euros. In this case, the cost of currency conversion and the risk of exchange rate fluctuations is borne by both parties. However, if the counterparty has a Vostro account, the transaction will be settled in Indian rupees rather than exchanging dollars.

A Vostro account is a domestic bank-maintained account that holds the assets of a foreign entity in local currency. The Vostro account is frequently used to speed up the settlement of transactions involving Indian rupees. As of right now, the RBI has approved the opening of 12 Vostro accounts for trading Indian rupees.

India and its bigger trading partners, Saudi Arabia and the UAE continue to discuss the viability of trade in rupees. Countries like Tajikistan, Cuba, Luxembourg, and Sudan have also shown interest in the rupee trade mechanism.

Additionally, because India has a trade deficit—its imports exceed its exports—settling trades in rupees will prevent the outflow of dollars. Saving currency outflows becomes even more important for the RBI at a time when the value of the rupee against the US dollar is falling every week.

Benefits for India

1.  No foreign exchange risk is involved.
2. Exporters will be able to set the most competitive pricing for their exports as they will be entitled to all the other benefits like export incentive schemes, RoDTEP (Refund of Duties and Taxes on exported Goods)
3. Long-term influence on regional nations wanting to trade with India.
4. Reduce India’s dependency on the US dollar

The most recent trade statistics show that in April and May, India imported $2.5 billion worth of goods from Russia. This annualizes to $30 billion, and according to analysts, it might reach $36 billion.

In the best-case scenario, India would wind up saving $30-36 billion in dollar outflows if it paid for all of its Russian imports in rupees.

A currency is typically referred to as international if it is widely used as a means of exchange for trade on a global scale. According to the RBI, using rupees for trade settlement would lessen reliance on hard currencies like the dollar, euro, and yen.

As per the recent developments in the trade settlement mechanism, we may expect the Indian rupee to emerge as a global currency in the coming years.

 

 
International Trade Settlemment in Indian Rupees
Read More
The Indian Wedding Industry

 

The Indian wedding industry made almost 3.75lakh crores in November and December 2022 across 32 lakhs weddings and that’s more than the auto market in India. The industry is the fourth biggest industry but is still so underdeveloped and unorganized.

Since a few years ago, it has been observed how a wedding has evolved from a simple ceremony for tying the knot, the twinning of hearts, sharing of food, and family into a planned sequence of occasions that supports numerous sectors. The transformation of the big fat, big budget, big crowds, and show of strength statement weddings into small, big budget, and intimate weddings similar to the Virushka wedding is now becoming the new normal and is also a preference of many couples who want to cherish the special moments in a cozy setting. This has caused a number of tiny specialist enterprises to emerging, supporting this industry's 25–30% annual growth rate.

There are various components that make this industry Rs 3.75 lakh crore economy. These are catering and venue services which take about 30%, gifts take 19%, decoration 14%, event planning 12%, logistics 9%, honeymoon 8%, photography 3%, make-up 3%, and invites 2%.

The wedding industry isn’t one industry per se but many big and small industries that make it what it is. Let us have a look at the businesses that gain from India’s wedding bonanza

1.  Matrimony Portals
2. Jewellery
3. Clothing
4. Hotels
5. Luggage and some others

About 60,000 crore worth of jewellery is bought annually for weddings, 5000 crore worth of hotel rooms are booked yearly, and about 10,000 crore worth of apparel is bought yearly.

According to a survey conducted by WeddingWire India last month, 31% of wedding industry vendors have decided to raise their prices due to high product and labour costs across categories, and nearly half of the company's wedding vendors' monthly earnings (42.5%) have increased in 2022 compared to 2019.

Despite any standards or regulations, the wedding business is prospering. Business in this sector is primarily driven by recommendations, reviews, and word of mouth. Vendors and clients would benefit from a (self)-the regulatory agency that provides a one-stop shop for wedding-related services. Customers would choose the best service provider based on their preferences and budget after all registered vendors had to disclose pricing and service data openly, and transparently. The industry should be allowed to adopt this coordinated framework, which is already used by five-star hotels and clubs and provides a win-win situation for all parties involved.

To know different perspectives on Indian Weddings I will be coming up with a very special video on my YouTube Channel so stay tuned!

To know more about what goes into the financial planning of wedding, please checkout the video below:
                                                                                                   
The Indian Wedding Industry
Read More
Is USD Dying?

 

Yesterday, Donald Trump who served as the president of the United States from 2017 to 2021, said that “Dollar is crashing and will soon no longer be the world standard”. This statement sparked speculation and concern about the future of USD & global trade.

Firstly, it's important to understand what it means for a currency to be the world standard. The US dollar has held this position since the end of World War II, largely due to the strength and stability of the US economy. As the world standard, many countries use the dollar as a reserve currency, meaning they hold large amounts of dollars in their foreign exchange reserves. Additionally, most international trade and financial transactions are conducted in dollars. This gives the US a significant amount of influence over global economic affairs.

However, Trump's warning that the dollar could lose its status as the world standard is not a new concern. Many countries, have been looking for ways to reduce their dependence on the dollar and increase their own currencies' importance on the global stage. This is also called as “de-dollarisation” move. It is in part due to concerns about US economic policy (e.g. heavy money printing by US in period of COVID lockdown) and the potential for sanctions that could hurt their economies (e.g. sanctions on Russia)

We can also see the below chart, which shows the declining % of USD in global forex reserves.

India is no exception to this de-dollarisation move. RBI has given permission to banks from 18 countries to open Special Vostro Rupee Accounts (SVRA) and use Indian rupees to settle payments. Renowned economist Nouriel Roubini, also known as 'Dr. Doom' by Wall Street, in February said that the Indian rupee over time could become one of the global reserve currencies in the world. China has also been stepping up the use of the Yuan as a trade settling mechanism. Last year, Yuan-denominated trade flows between Russia and China surged. Vladimir Putin said he supports using the Chinese Yuan for trade settlements between Russia, Asia, Africa and Latin America.

But it is not just about standalone countries, the BRICS ally is also reportedly exploring the creation of a common currency for trade amongst themselves. BRICS stands for Brazil, Russia, India, China and South Africa, which is an alliance of 5 powerful emerging countries. The BRICS countries represented 31.4% of the global GDP (2020), but its members hold less than 15% of the voting power at both the World Bank and the International Monetary Fund. This move by BRICS can also help it to gain influence in global market.

A new financial arrangement, seen with potential to translate into a common BRICS currency, could be announced as soon as August 2023 at the forthcoming BRICS summit in South Africa. The plan is to initially transition to using domestic currencies in transactions, and then explore the introduction and circulation of a digital or an alternative form of currency.

The potential challenge in the success of this move is the bilateral differences between India and China due to ongoing military standoffs along the Line of Actual Control between the two Asian giants. However, Babakov, the deputy chairman of the Russian parliament, the State Duma, believes that the BRICS leader’s summit will reveal preparedness to implement this particular initiative, with work on the project ongoing.

In conclusion, the dominance of the US dollar in global finance has led to many countries exploring ways to circumvent its usage. However, only time will tell if these initiatives will be successful in the long run.

Is USD Dying?
Read More
Bretton Woods Agreement

 

It said, “Everything is fair in Love and War!”, is it?

The economic devastation caused by the Great Depression in the 1930s left many countries struggling with high unemployment rates, poverty, and political instability. Many countries, including the United States, implemented protectionist trade policies in response to the Great Depression. This led to a decline in international trade and increased competition for resources, creating tension between countries. Countries had also engaged in competitive devaluations of their currencies, which destabilized the global economy and along with a few other factors contributed to the outbreak of World War II.

Towards the end of World War II, a collective need was felt to take steps to prevent a repeat of the economic chaos that had occurred during the interwar period, which had contributed to the outbreak of the war, which brings us to the Bretton Woods Agreement.

What was the Bretton Woods Agreement?

The Bretton Woods Agreement was signed in July 1944, toward the end of World War II. The agreement was negotiated by representatives of 44 Allied nations at a conference held in Bretton Woods, New Hampshire, USA. The main purpose of the agreement was to establish a new international monetary system that would help to promote economic stability and prevent a repeat of the economic chaos that had occurred during the interwar period.

It aimed to establish a system of fixed exchange rates, with the US dollar as the world's reserve currency. Under the agreement, other currencies would be tied to the US dollar at a fixed exchange rate, and central banks would be able to convert their dollars into gold at a fixed rate of $35 per ounce.

The two main parties to the agreement were the US and the UK, which were the dominant economic and military powers at the time. The US played a leading role in the negotiations and had the most influence over the final outcome of the agreement.

But why do the United States and the US Dollar have an upper hand in this agreement?

The US was a dominant economic and military power at the time. They had emerged from World War II as the world's largest economy, with a powerful military and vast reserves of gold. The US also had a vested interest in promoting international trade and investment, as it was a major exporter of goods and services.

In contrast, Europe was in a weakened state after the war, with its economies and infrastructure badly damaged. Europe also faced a number of political and social challenges, such as the need to rebuild their societies and economies, and the rise of communist movements.

Given these circumstances, the US was able to use its economic and military power to shape the terms of the Bretton Woods Agreement in its favor. The US was able to establish the US dollar as the world's reserve currency, and other countries were required to tie their currencies to the dollar at a fixed exchange rate.

What did the Bretton Woods Agreement facilitate and what was its impact?

As mentioned earlier, the Bretton Woods Agreement facilitated international trade and investment by providing a stable framework for the exchange of currencies. It provided a mechanism for countries to settle their international accounts through the International Monetary Fund (IMF). The IMF was established to provide loans to member countries facing balance of payments difficulties and to oversee the exchange rate system to ensure that countries complied with the rules of the agreement.

The agreement had a significant impact on the global economy and international trade. The fixed exchange rate system helped to promote economic stability and facilitate international trade and investment. Countries were able to rely on stable exchange rates when making international transactions, which helped to promote economic growth and reduce uncertainty. Growth was also seen in the international financial markets, as investors were able to make international transactions with greater ease and confidence. The agreement helped to promote the development of new financial products, such as international bonds and currency futures, which facilitated international investment and trade.

The Bretton Woods Agreement also helped in the reconstruction of Europe after World War II. The US provided significant financial assistance to Europe through the Marshall Plan, which helped to rebuild the economies of Western Europe and promote economic integration in the region.

And last but not the least, this agreement helped the United States to establish the US dollar as the world's reserve currency, which gave the US significant influence over the global economy. The US was able to print dollars to finance its international obligations, such as military spending and foreign aid, without having to worry about the value of the dollar being eroded by inflation.

End of the Bretton Woods Agreement -

Despite the initial success of the Bretton Woods Agreement, the system came under strain in the 1960s as the US experienced rising inflation and balance of payments deficits. The US government had been spending heavily on the Vietnam War and domestic programs, while also maintaining a fixed exchange rate system that required the country to maintain a stable supply of dollars.

As a result, the US began to print more dollars to finance its obligations, which led to inflation and a loss of confidence in the US dollar. Other countries began to demand gold in exchange for their dollars, which put pressure on the US gold reserves. Therefore, in 1971, President Richard Nixon announced that the US would no longer exchange dollars for gold, effectively ending the Bretton Woods Agreement. This event marked the end of the fixed exchange rate system and the beginning of a new era of floating exchange rates, in which currencies fluctuated in value based on market forces.

How did the end of the Bretton Woods Agreement impact the world?

The end of the Bretton Woods Agreement had a significant impact on the global economy and international trade. The floating exchange rate system led to greater volatility in currency values and made it more difficult for countries to manage their economies and conduct international transactions. It had major implications for developing countries, which were often at the mercy of market forces and vulnerable to sudden shifts in exchange rates. The IMF continued to play a significant role in managing the global economy, but its effectiveness was limited by the lack of a fixed exchange rate system.

In the years following the end of the Bretton Woods Agreement, there were many attempts to create new international monetary systems that could better manage the global economy. One such attempt was the European Monetary System (EMS), which was established in 1979 and aimed to promote monetary stability in Europe through a system of fixed exchange rates. The EMS was ultimately unsuccessful, and the system was replaced by the European Economic and Monetary Union (EMU) in 1999 which established the euro as another major reserve currency in the global economy.

Another attempt to create a new international monetary system was the Plaza Accord, which was signed by the finance ministers of the US, Japan, West Germany, France, and the UK in 1985. The accord aimed to address the issue of the US dollar's overvaluation and led to a significant depreciation of the dollar against other major currencies. It was successful in reducing the US trade deficit and promoting economic growth in other countries, but it also contributed to the growth of Japan's export-led economy and the subsequent economic bubble in the country.


Legacy of the Bretton Woods Agreement:

The legacy of the Bretton Woods Agreement is the role of the US dollar as the dominant global reserve currency. While the dollar has faced challenges in recent years from the rise of other currencies like the euro and the Chinese yuan, it remains the world's most widely held reserve currency. The use of the dollar as a reserve currency has helped to cement the US's position as the dominant global economic power, but it has also led to concerns about the stability of the global economy and the potential for financial crises.

As the global economy continues to evolve and new challenges emerge, it is important to learn from the lessons of the past and to work towards creating a more stable, sustainable, and equitable international economic system. Whether through reforming existing institutions or creating new ones, there is a need for continued efforts to promote economic development and stability for all countries around the world. Until next time…

Bretton Woods Agreement
Read More