in 1986 posted a $76million profit after a $24 million operational loss. These profits were theresult of a $100 million profit from foreign exchange.Many orders for products or services are agreed on well in advance,along with future currency values. During the negotiations, prices arealways set. However, it is equally important to protect these contracts fromexposure to free-floating currency. For example, in June, a U.S. corporationenters into a contract with a corporation in Japan. Japan will manufacture aproduct for a price of 1.2 million yen, which works out to $10,000 with theUSD/JPY currently trading at 120.00.1.2 million yen  120.00  $10,000 (price agreed on by both parties)In 6 months, that currency pair could be trading at the same price of 120.00,but more likely, the price will not stay the same as currencies continuouslychange.Let’s take a look at how the U.S. corporation would be affected if thepair were trading at 100.00 or 140.00:1.2 million yen  100.00  $12,000 (cost increases for U.S. corporation)1.2 million yen  140.00  $8571 (cost decreased for U.S. corporation)As these examples show, fluctuation of currencies can have a positiveor negative effect. The proliferation of risk-management tools, the extraordinary volume of literature that is published on the subject, and the focusing of academic attention on improving risk-management techniques allpoint to the importance of risk management as a key management issue.Active risk management is a common characteristic in by far the majorityof major corporations the world over. Not to manage financial risk is seen tobe negligent because a company’s management team is responsible for managing all the variables that ultimately affect the profitability of the company.
FORWARD TRANSACTIONSWhile profit can turn into losses quickly, corporations have found itmandatory to enter into forward transactions, such as futures, swaps, andoptions.
CHAPTER 14
CORPORATIONS IN THE FOREX
181
FUTURESForeign currency futures are forward transactions. These transactions havestandard contract sizes and maturity dates, for example, 1 million Japaneseyen for next January at an agreed-on rate. These contracts are traded on aseparate exchange set up for that purpose.
SWAPSThe most common type of forward transaction among corporations is thecurrency swap. In a swap, two parties exchange currencies for a certainlength of time and agree to reverse the transaction at a later date. This willoffset both corporations from exposure to the fluctuating market.
OPTIONSCurrency options can efficiently lower a corporation’s currency riskbecause they are custom tailored to the specifications of the corporation.The corporation is able to determine the amount of currency being hedged,the length of the option, and the degree of exposure to market fluctuations.A currency option is an insurance policy for a corporation in which itdetermines the deductible, length of the policy, and coverage. The advantages of hedging with options include●
Currency risk exposure is limited to predetermined amounts.
●
The potential for profit from currency market fluctuations is not limited.
●
Only minimal cash outlays are required in relation to other hedgingmethods.
EXAMPLES OF STRATEGIESSCALED-IN SELLINGThis is a very simple strategy, and it is also particularly successful. It normally involves the estimation of a range that the relevant currency willtrade in over the period of the exposure.When an importer needs to purchase U.S. dollars, he or she would seek tobuy the dollars when the AUD/USD exchange rate is at its highest. Assumethat the current exchange rate is 0.6300 and that it is felt that the AUD/USD islikely to trade at between 0.6250 and 0.6600 during the life of the exposure. Inthis case the importer would set up a strategy such as the following:
FOREX MADE EASY
182
At 0.6400, purchase 20 percent of requirements.At 0.6450, purchase 20 percent of requirements.At 0.6500, purchase 20 percent of requirements.At 0.6550, purchase 20 percent of requirements.At 0.6600, purchase 20 percent of requirements.In this way, an average rate of 0.6500 is achieved instead of the prevailing spot rate of 0.6300. However, if the view turns out to be incorrect,then the worst-case trigger is touched, and the exposure is covered at0.6245, just outside the expected range. This is only 55 pips worse thancovering at the then-spot rate. If the best case is achieved, then you havedone better by 200 pips.
TAKING OUT “INSURANCE”This type of strategy employs foreign exchange options, which are widelyused products. Let’s look at the case of a corporation that suffers when theAUD loses value. If that corporation were to buy an option that would protect it from downward movements in the AUD but still left it with theopportunity to benefit if the AUD were to gain strength, then this wouldappear to be a good, safe strategy, and in fact, it is.Options are just like insurance. They protect against worst-case scenarios while still leaving room to benefit when things are favorable.
WORKING AN EXPOSUREThis is a fairly aggressive strategy in which a business unit hedges and nonhedges the exposure to take advantage of a market that is range trading andseems to have no real direction. For example, if the business unit hedges theexposure at 0.6500 and the AUD/USD rate subsequently falls to 0.6300, thebusiness unit could take a profit of 200 pips.Assuming that the rates were just range trading and went back up, thebusiness unit could put on the hedge again at 0.6500, and because of the 200pip profit, it achieve an average rate of 0.6700. This may happen a number oftimes, and extraordinarily effective rates of exchange may be achieved.It sounds risky, but a worst-case plan can easily guard against the situation where the AUD starts to depreciate rapidly. For example, the exposureis fully covered if it breaks lower than 0.6250. At this time the corporatemay already have 400 pips up its sleeve.The number of different strategies available is only limited by the imagination and the skill of the planner. It is not difficult to formulate these strategies with the right advice, and it is certainly not difficult to implement them.
CHAPTER 14
CORPORATIONS IN THE FOREX
183
PORTFOLIO MANAGEMENT AND CURRENCY RISKFund managers have different foreign exchange requirements than corporations because foreign exchange exposures occur as a result of investmentactivities as opposed to trade activities. Fund managers are often workingwithin a benchmarked framework, and managing foreign exchange risksincorrectly can give rise to unwanted and unexpected deviation on returns,even when they are trying to stay at benchmark.Fund managers should be aware of not only the benchmarks set forthem but also how to manage to the benchmark return. This is often morecomplex than may first appear because benchmark indices are set periodically, and fund size changes can affect the currency weighting in unexpected ways.
FULLY HEDGED PORTFOLIOSMost fund managers run international bond portfolios fully hedged,which means that for every foreign bond exposure, they have a corresponding hedge in place. Usually the hedge takes the form of a forwardsale of foreign currency for, say, Australian dollars normally on a rolling3-month basis.In practical terms, this means that on purchasing a foreign bond, thefund manager should enter a swap or forward (FX) contract. This meansthat on the near leg of the swap, the manager can buy the foreign currencyagainst AUD (to pay for the bond), and the second leg is for the sale of theforeign currency against the AUD and neutralizes the forward risk.An example would be a fund manager executing a spot to buy the foreign currency and then an outright deal to sell the foreign currency forward. The net effect is the same as a swap, except that the fund pays anunnecessary spread in the spot market.Once the hedges are due for settlement, the fund simply executesanother swap. The near leg is equal and opposite to the maturing deals(except that the rate is now the current spot), and the second leg reinstatesthe forward hedge.The portfolio manager also needs to decide which currency to keepconstant—Australian dollars or the foreign currency. In general, it is theforeign currency that should be kept constant in line with the value of thebond holdings.If the foreign currency hedge amount is kept constant, be aware thateach roll date will give rise to an AUD profit or loss on the hedge. Also, ateach roll date the value of the foreign bond needs to be taken into account
184
FOREX MADE EASY
and the hedge adjusted accordingly to make sure that the portfolio is notover- or underhedged.
NONHEDGED PORTFOLIOSWhen a fund manager is running a portfolio nonhedged, then foreign currency should be bought and sold as needed to satisfy the underlying transaction. These transactions should be executed when the underlying assetsare purchased or sold and have value dates matching the settlement termsof the underlying asset.Foreign currency is the key to the economic stability of all governments and countries. As long as governments and corporations do businesswith each other across the world, foreign currency transactions will beprevalent. Every transaction will have a positive and a negative just as ifyou or I were trading the currency.
C
H
15A
P
T
E
R
THE BUSINESSOF TRADING●
Starting Your Business
●
The Tax Code
●
How to Become a Trader
●
What If I Don’t Make Enough Money to Use Those Deductions?
●
How to Make the Win/Win Better
●
What Kind of Corporation Should You Use?
●
Let’s Take a Look at Some Examples
STARTING YOUR BUSINESSNow that you are a trader, you should always be on the lookout for ways toincrease your returns. In addition to increasing the actual returns you make ontrades, you also should look for ways your trading can make or save you money.In reality, it doesn’t matter where your income or profit comes from aslong as your cash increases at the end of each month. This is what I refer toas the business of trading.Most people don’t think about trading as a business, but I learned longago that the best returns frequently can be made by looking at things dif185Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for terms of use.
FOREX MADE EASY
186
ferently than most people. If you change your thinking and start looking attrading as more than just investing but actually as a business that providesincome for you and your family, I think you will be pleasantly surprised atthe benefits you receive.In the first place, a small business is about the only great tax shelterstill available that the Internal Revenue Service (IRS) hasn’t been able tostrip away. Not that it hasn’t tried, but Congress has stubbornly realized thatit is the entrepreneurial sprit that makes this country what it is, so it hasconsistently avoided reducing the benefits businesses offer to their owners.Naturally, it doesn’t hurt that most congresspersons and senators eitherhave small businesses or relatives who have one, but let’s be thankful for thelittle favors we get, no matter where they come from or what form they take.
THE TAX CODEThe tax code classifies people in the securities business into three categories: dealers, investors, and traders. The dealer classification is beyondthe scope of this book because it involves people making a market in stocksand other securities for investors. Investors and traders, however, are veryimportant and affect the way we buy and sell currencies or securities andwhat deductions we are allowed.Most people consider themselves investors. They invest and look for areturn on their money. Investors, however, do not get any tax benefits otherthan the potential of capital gain tax treatment on anything they buy andhold for more than a year.In this market, holding anything for as long as a year may be a financial disaster; the benefit isn’t all that great today, In fact, the jaded side ofme wonders if the fact that it isn’t really a benefit is the real reason Congress is thinking about doing away with the tax on capital gains.If, instead of being an investor, you decide to be a trader, here is a partial list of benefits in the form of tax deductions you get:●
The cost of your trading education
●
The cost of financial software
●
The cost of books and audio/videotape courses in investing and trading
●
Accounting fees
●
Brokerage account fees and commissions
CHAPTER 15
THE BUSINESS OF TRADING
187
●
The cost of office equipment (computers, Internet high-speed connection fees, adding machines, phones, phone charges, etc.)
●
Interest on your margin accounts and any other investment-relatedinterest expense
●
The cost of financial advice and training
●
The cost of tax advice
●
The cost of legal advice related to your business
●
Entertainment and meals expenses during which business is conducted
●
The cost of travel to seminars, trade shows, and other businessrelated trips, anywhere in the world
●
The cost of magazine subscriptions related to investing and trading
●
The cost of trips to look at corporations in which you are consideringinvesting
●
The portion of your home expense that qualifies as a home businessand a portion of all expenses paid on maintaining the property
●
Automobile expenses
You can tell that the list is rather inclusive and beneficial. Interestingly,as you begin to learn the nuances and combine all the advantages, they addup to a rather tidy sum. For example, if the year you become a trader youpurchase a new car to be used in your business, you can take an immediatededuction for the first $25,000 because the car qualifies under Section 29of the tax code, which allows for asset expensing of the first $25,000 ofproperty bought for use in your business each year.The rest of the cost of the car can be set up on a depreciation schedulefor future years. It isn’t a reason to go out and buy a new car (or is it?), butit isn’t bad.
HOW TO BECOME A TRADERThe IRS code does not define trade or business as it relates to the businessof trading. The law that has developed comes from court cases and decisions made in the favor of taxpayers who have made this claim. The keyelements in the cases were length of holding period, frequency of trades,
188
FOREX MADE EASY
and whether the person’s activity was intent on making the money fromdividend interest, long-term gains, or profits from short-term trading.If you are a currency trader, it is pretty easy to show your intentbecause this is all you shoot for. If you also trade stocks, you can still makea claim for trader status even if you hold some of them long term, althoughit is doubtful you will anyway.
WHAT IF I DON’T MAKE ENOUGH MONEYTO USE THOSE DEDUCTIONS?While we all hope our businesses, including our trading business, makes aton of money, the reality is it won’t always do so. The good news is that iftrading is a business, then your excess expenses can be used to offsetincome from other sources, just like any other business would allow you todo. It is a win/win situation.
HOW TO MAKE THE WIN/WIN BETTERSo far I have talked about using trader status as it relates to your personaltax return by creating a small sole proprietorship. In this case you wouldplace your ordinary business expenses on Schedule C, and you wouldreport your income or loss on Schedule D because it is still considered capital. No self-employment income is calculated on the income, and yourtrading losses are still limited to $3000 per year but can be carried overindefinitely. You also can use any losses in the stock market to offset gainsin the currency market.Although the benefits of this strategy are good, there is another way—and in many ways, a better way—to operate the business. This is by incorporating the business and creating your own trade corporation.A trade corporation is your new legal entity in which to conduct yourtrading. There are near-term advantages, longer-range asset protection, andfamily financial planning advantages. There will be some extra cost forsetup and operation, but as you will quickly see, the advantages far outweigh the cost.Your first advantage is clarity of purpose. If you form a corporation forthe purpose of trading and conduct the trading in that separate entity, therewill be no question regarding your trader status, nor an issue about yourpersonal tax return and the deductions you take. This is not to suggest that
CHAPTER 15
THE BUSINESS OF TRADING
189
operating things in the sole proprietorship status is in the gray area of thetax code. It isn’t.Some people like to keep their various businesses separate, protectassets from different creditors, and do estate and financial planning as theygo. If you fall into this category of individuals, you should consider using acorporation as the entity to operate your trade business.
WHAT KIND OF CORPORATION SHOULD YOU USE?There are three types of corporations: a C Corporation, which is considered a regular corporation; a Sub S Corporation, so named because of thetax code section that gives it benefits, and the Limited-Liability Corporation (LLC), which is a relatively new corporate structured to overcomesome of the structural difficulties of the Sub S Corporation. (Interestingly,about the time the states got through adopting all this massive legislation toget around the tax code, Congress decided that it didn’t want to be outdoneand amended most, but not all, of the difficult portions of the Sub S code.)To be fair to both you as the reader and me as the author, I must nowdisclose that I am going to make sweeping generalities about which corporations are best and why. The problem is that everyone’s circumstances aredifferent, and volumes have been written about the “best” structure to use.Nevertheless, I will attempt to weed through the jargon of red tape and seeif some meat comes forth.The C Corporation is used primarily for public companies, multipleshareholders who aren’t interested in distributing profits and losses butwant to build an entity, and individual businesses that want to benefit froma medical reimbursement plan and/or some types of retirement programs.For some people, the medical reimbursement can be a great deal becauseunder the current law individuals and joint filers are limited to medicaldeductions after a 2 percent limitation of adjusted gross income.If you make $150,000 per year adjusted gross income, you can onlydeduct medical expenses above $3000. If, on the other hand, you have a CCorporation and you have adopted a medical reimbursement plan, youwould be able to get a deduction from the first dollar, plus all of your family’s expenses. It is a nice benefit if you need it.Excepting the medical situation, you likely will benefit greatest ineither a Sub S Corporation or an LLC. The reason is that both have tax flowbenefits at the shareholder level. This means that the corporation does notpay a separate tax but that the shareholders (in the Sub S) and the members
190
FOREX MADE EASY
(in the LLC) pay tax on any gain or take losses personally if there are any.This gives you the benefit of a personal tax shelter in years there is a loss inthe company.The benefit to using a Sub S structure is that it has been around thelongest and most certified public accountants (CPAs) and attorneys arecomfortable with it. The benefit of the LLC is that you can do some interesting family, estate, and asset-protection planning.
LET’S TAKE A LOOK AT SOME EXAMPLESYou form an LLC trade corporation. In an LLC, you are allowed to issuemultiple types of shares. Because you would like to shift some of your tradeincome to your children, you issue them a preferred class of stock that hasno voting rights but has a preference of income up to a certain level.This “income shift” strategy allows you to maintain 100 percent control of your company and all the assets but shift dollars to your children,who are in a lower income bracket than you. The children can use themoney to pay their bills.Another twist on this strategy is to pay your children a salary out of thecorporation for work they do. The work, depending on age and ability,would give them earned income and allow them to set up an IndividualRetirement Account (IRA) or other retirement program at an early age.While income shifting takes money out of your pocket and puts it insomeone else’s, you get the deduction, and if you can control what happensto the money, it is the same as having it. Another benefit to helping yourchildren grow an early retirement program is that you may at least havesomeone to support you if things don’t always go as you would like.LLCs have another advantage: They can be used to protect assets. Ifyou find yourself in a situation where you need to be protected, you can putyour assets in an LLC and give, sell, or otherwise structure the share ownership in someone else’s name. You can continue to draw a salary from thecompany and control the operation of the company through special shares,which can be drafted to give you specific rights to do so.The assets now belong to someone else and are no longer attachable bycreditors, and the income you receive is not attachable because it is a salary.(Some states give certain creditors rights to lien a potion of salary, but thiscan be adjusted to fit the situation.) Please note that in this example youhave actually given up these shares and the assets they represent. This can
CHAPTER 15
THE BUSINESS OF TRADING
191
be a shame. On the other hand, in the scenario I outlined, you would havelost the assets to a creditor not of your choosing.By using this structure you at least shifted the assets to someone youknow, and you get income generated from the company in the form of asalary. I also would like to point out that there are laws governing fraud oncreditors. These laws do not prevent you from properly protecting yourselfand your family but are intend to stop what are called sham transactions,where there is no truth or substance to your actions. Since we are only talking about proper planning, these and other strategies should all be availableto you and used when needed.
This page intentionally left blank.
A
P
P
E
N
D
I
X
BRETTON WOODSSYSTEM ANDPOST–BRETTONWOODS SYSTEM
I
n July 1944, in Bretton Woods, New Hampshire, representatives of44 nations met to establish the standards by which international tradeand finance would be conducted once World War II had ended. Thisincluded not only specification of the exchange rate and paymentssystem that would prevail but also provisions for helping the thirdworld nations develop in the postcolonial era.In its final form, the plan was something less than its primary architects, Harry Dexter White and John Maynard Keynes, had hoped. Nonetheless, the stability it lent to the postwar period helped create an environmentconducive to recovery. However, the tranquility was not to last. In the end,it appears that the exchange rate and payments mechanism contained theseeds of its own destruction, allowing—even encouraging—developmentsto take place that led to its demise.Meanwhile, many argue that the efforts to develop emergingeconomies have done more harm than good (Danaher 1994). From those193Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for terms of use.
194
FOREX MADE EASY
events, especially the massive internationalization of capital, evolved themodern international monetary system.Independently, White, in the United States, and Keynes, in GreatBritain, had been developing ambitious plans for the postwar internationaleconomy since the early 1940s (Shelton 1994, pp. 24–28). Both had conceived of a system wherein exchange rate stability was a prime goal, andthey shared an intense desire to engineer an arrangement that promotedcooperation and humanitarian goals. Neither of them favored a return to aclassical gold standard.The most significant difference between their approaches was thatWhite’s scheme tended to favor incentives designed to create price stabilitywithin the world’s economies, whereas Keynes wanted a system thatencouraged economic growth. In the end, though, true compromise wasachieved on some points, and the overwhelming economic and militarypower of the United States led to the adoption of a largely American plan.The international monetary system that emerged was a gold exchangestandard. The U.S. dollar was fixed to gold and convertible on demand (at$35 per ounce). All other currencies were fixed to the dollar (and thereforeto gold) and were allowed to fluctuate around that value only within a narrow band. Central banks were expected to intervene in the event that theirhome currency moved or threatened to move outside that band.If a currency’s value appeared to have permanently shifted well beyondthe par rate, the country in question had the right under the articles ofagreement to declare that a fundamental disequilibrium existed. The rulesof the system were then supposed to allow that country some recourse(either revaluation or devaluation of its money).In addition to these exchange rate–specific regulations, Bretton Woodsalso established a fund (the International Monetary Fund) from whichcountries could draw when facing temporary payment difficulties. At thesame time, the World Bank was established to help integrate the less developed economies into the world capitalist economy. This was to be achievedthrough a combination of advice, direct loans, and guarantees of thirdparty loans.The spectacular growth of the former combatants after the war is wellknown. Bretton Woods was certainly not the only reason for this “miracle,”especially in light of the fact that not all of its provisions (in particular, theconvertibility obligations) were in full force until 1958 and that the impactof U.S. policy, especially the Marshall Plan, was undoubtedly greater thanthat of the World Bank. Nonetheless, their stabilizing presence in this particularly unpredictable period must have encouraged international trade
APPENDIX
BRETTON WOODS SYSTEM AND POST–BRETTON WOODS SYSTEM
195
and investment. By the late 1960s, however, flaws in the exchange rate andpayments system were becoming evident.To begin, the par rates set after the war assumed an overwhelminglydominant U.S. economy. At first, this proved an accurate assumptionbecause the United States ran large balance-of-payments surpluses until1950. However, as the European economies recovered, the U.S. paymentsbalance slipped into deficit. This was relatively small until 1958, when itbegan to increase sharply.Given the worldwide shortage of dollars, this was a not unwelcomedevelopment. However, as it continued well into the 1960s, and especiallywhen the U.S. current account went into deficit in 1968, it was soon clearthat a devaluation of the dollar was necessary.Unfortunately, a mechanism for dealing with chronic payments imbalances and adjustments of the peg was never really finalized. As suggestedearlier, Keynes had preferred arrangements that encouraged world growth.Consequently, his recommendations for reducing imbalances were aimedevery bit as much (perhaps more so) at surplus countries as at deficit ones.He believed that the accumulation of surplus affected the world economy inthe same way that savings reduced demand in a domestic economy.The United States, as a likely creditor nation, balked at Keynes’ plan.While White was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary, it was widely believed bythe U.S. contingent that the postwar economy was likely to be very inflationary (Bernstein 1989, p. 30; Walter 1991, pp. 155–156). The inability toarrive at a satisfactory compromise left them with no systematic means ofaddressing the issue (Walter 1991, pp. 154–156).Thus, when “fundamental disequilibria” did occur, there was no automatic provision for dealing with them. And even though deficit countrieswere allowed considerable latitude to simply declare devaluations, in practice, the political implications of this kept them to a minimum (at leastamong the developed countries). Meanwhile, surplus countries were content to accumulate reserves.To complicate matters, the United States was very reluctant to devaluegiven the status of the dollar as the international currency. Though anattempt was made to save Bretton Woods in 1971 (the Smithsonian Agreement), by 1973 the inability to agree on par rates led to its collapse. Thereasons for its disintegration went beyond the inability to efficientlyaddress payments imbalances.The massive internationalization of capital that had been taking placesince the late 1950s and early 1960s had placed tremendous pressure on the
196
FOREX MADE EASY
fixed-rate system. Keynes had already warned that capital controls would benecessary if central banks were to have the power to defend the parities setunder Bretton Woods (Krause 1991, pp. 62–65). He recommended “notmerely as a feature of the transition, but as a permanent arrangement . . . theright to control all capital movements” (Bryant 1987, pp. 61–62). As part ofthis policy, he submitted that all currency be converted through central banks.Although market convertibility was substituted for official, Keynes’sentiment is reflected in the articles of agreement. Under Bretton Woods,pure capital flows could be, and were, controlled (Fraser 1987, pp. 19–28).In practice, each country put in place regulations intended to “balkanize”the various national capital markets (Krause 1991, p. 64).However, as U.S. payments deficits caused dollars to accumulate inEurope, a combination of investors’ desire to avoid the “balkanizing” controls and other considerations (such as U.S. limits on deposit interest andthe growth of multinational industry and finance) led to the rise of theEurodollar market.From 1964 (the first year for which figures are available) to 1973, theEurodollar market grew from the equivalent of $20 billion to $305 billion(Sarver 1988, pp. 6–7). The changing importance of the U.S. economy relative to Europe was already making the old par rates obsolete. The growingsize of capital flows was now making actual and potential movements inexchange rates much larger, unpredictable, and uncontrollable.With such capital available for speculation, apparent exchange rateproblems quickly could become crises. By 1973, speculators had challenged and defeated every central bank, including the Federal Reserve(Moffitt 1983, pp. 71–92). The internationalization of capital had thepotential to both cause and exacerbate fundamental disequilibria, and withno practical means of resolving these problems, Bretton Woods failed.The failure of the World Bank to answer the challenge of world poverty,while less spectacular than the collapse of the Bretton Woods, has been farmore tragic. The political ideology and economic approach of that institution have been so far removed from the realities of those struggling withunderdevelopment that bank plans typically focus more on controllinginflation and introducing austerity plans than they do on addressing hungerand powerlessness (Danaher 1994).The additional burden placed on so many in the third world by thedebts created during the OPEC oil embargoes makes their future even morebleak. It does not appear that there is much about which to be encouragedregarding the policies that we may expect to see emerging from the WorldBank in the near future.
APPENDIX
BRETTON WOODS SYSTEM AND POST–BRETTON WOODS SYSTEM
197
Regarding international payments and exchange rates, immediatelyfollowing the collapse of Bretton Woods, the stage was set for the continued growth and domination of the international capital market.Today, the overwhelming majority of currency transactions are relatedto capital. As a consequence, policymakers are forced to consider the reaction of international financial markets to each and every policy move lestthey be “punished” by capital outflows and