Btap Ib Chapter 12

BTAP IB CHAPTER 12
1. Please explain the pros/cons of the gold standard.
PROs
 Gold retains a value that has been recognized across the globe throughout
history, and a gold standard self-regulates to match the supply of money to the
need for it.
 A gold standard would reduce the risk of economic crises and recessions, while
increasing income levels and decreasing unemployment rates.
 A gold standard puts limits on government power by restricting the ability to
print money at will and increase the national debt.
 Returning to a gold standard would reduce the US trade deficit.
 A gold standard would force the United States to reduce its military and defense
spending and could prevent unnecessary wars.
 Many politicians, businessmen, and organizations support the return to a gold
standard.
CONs
 The availability and value of gold fluctuates and does not provide the price
stability necessary for a healthy economy.
 A gold standard would limit the ability of the Federal Reserve to help the
economy out of recessions and depressions, and to address unemployment.
 Gold standards create periodic deflations and economic contractions that
destabilize the economy.
 A gold standard would increase the environmental and cultural harms created by
gold mining.
 Returning to a gold standard could harm national security by restricting the
country’s ability to finance national defense.
 Many prominent economists oppose returning to a gold standard.
2. Please define and briefly mention the complexities around a reserve currency.
- A reserve currency is a large quantity of currency maintained by central

banks and other major financial institutions to prepare for investments,
transactions, and international debt obligations, or to influence their domestic
exchange rate. A large percentage of commodities, such as gold and oil, are
priced in the reserve currency, causing other countries to hold this currency
to pay for these goods.
- Understanding Reserve Currency

Holding a reserve currency minimizes exchange rate risk, as the purchasing
nation will not have to exchange its currency for the current reserve currency
to make the purchase. Since 1944, the U.S. dollar has been the primary
reserve currency used by other countries. As a result, foreign nations closely
monitor the monetary policy of the United States to ensure that the value of
their reserves is not adversely affected by inflation or rising prices.
3. What are your thoughts on ethics and money?
A lack of ethics often does not stop you from generating a return, in fact if you really want some
hard cash; removing emotion and basing all of your decisions purely on the goal to maximize
financial return - regardless of other consequences - may even help you make more.
It is easy to see the immediate benefits from money; the finance system demands we make
enough to satisfy our every want and need. If you take a moment to look around you will notice
that many of us will do anything it takes to get it, even if it means sacrificing moral values and
ethical behaviour. If given the choice between what’s best for the world and what’s best for our
wallet, more often than not we choose the latter. But at what cost?
Last week I had a conversation with an Uber driver. He asked me what I do for a living and
when I said I worked in finance, specifically the stock market, he immediately expressed concern
and wondered if I was “a crook just like everyone else”.
It got me thinking [as I chuckled and humoured him with some anecdotes] why would he assume
that I am a crook? It's no secret that the stock market has been a playground for scandals and
corruption, but what on earth are my industry colleagues doing that someone would think that in
2017? Nearly 10 years post GFC is the wake of the market collapse still resonating amongst the
general public? Have my colleagues not learned a thing? But more importantly what can I do to
change that perception?
In the western world, society defines value and success through the accumulation of assets and
money. Currency is a measure of value for these assets and if a customer ‘values’ your product
or service, they pay – make enough and you are considered successful. Nothing wrong with that
in theory.
Successful…how we get there is of minor importance. In fact the more I think about success the
more I want it, I’ll have a one way ticket please, no stops, I don’t care how just get me where I
want to be, I want to close my eyes and…. wait a second, close my eyes? Close my eyes to
what?
Doing something despite knowing it’s wrong seems crazy to me. There is a disconnect between
what we know, and what we do.
4. How does foreign debt enable and disempower countries?
Foreign debt is money borrowed by a government, corporation or private

household from another country's government or private lenders. Foreign
debt also includes obligations to international organizations such as
the World Bank, Asian Development Bank (ADB), and the International
Monetary Fund (IMF). Total foreign debt can be a combination of short-term
and long-term liabilities.
Foreign debt, also known as external debt, has been rising steadily in recent
decades, with unwelcome side-effects in some borrowing countries. These
include slower economic growth, particularly in low-income countries, as well
as crippling debt crises, financial market turmoil, and even secondary effects
such as a rise in human-rights abuses.
5. Please briefly define hedging and netting
Netting offsets the value of multiple positions or payments due to be exchanged between
two or more parties.
 Netting is used in a number of settings and instances—securities or currency

trading, bankruptcy, and inter-company transactions, among others.
 Netting can involve more than two parties, called multilateral netting, and
generally involves a central exchange or clearinghouse.
Hedging is a risk management strategy employed to offset losses in investments by taking
an opposite position in a related asset.
 The reduction in risk provided by hedging also typically results in a reduction in

potential profits.
 Hedging strategies typically involve derivatives, such as options and futures
contracts.
6. What is SWIFT and what does it do?

SWIFT is a vast messaging network banks and other financial institutions use to
quickly, accurately, and securely send and receive information, such as money
transfer instructions.

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BTAP IB CHAPTER 12

1. Please explain the pros/cons of the gold standard.

- A reserve currency is a large quantity of currency maintained by central

- Understanding Reserve Currency

3. What are your thoughts on ethics and money?

4. How does foreign debt enable and disempower countries?

Foreign debt is money borrowed by a government, corporation or private

5. Please briefly define hedging and netting

 Netting is used in a number of settings and instances—securities or currency

 The reduction in risk provided by hedging also typically results in a reduction in

6. What is SWIFT and what does it do?

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