The IEA works closely with governments, central banks and other agencies to monitor changes in the international exchange rate. It has also developed an integrated strategy that balances the interests of member banks, governments, central banks, and trading institutions. The organization also provides education and research on international economics, including the benefits of trading in currencies of different countries.
IEA member banks are given strict instructions on how to evaluate the risks involved with each currency. This includes considering the monetary and political policies of the country concerned and the country’s relationship with that country. They are also given advice on the best time to buy and sell and when to keep their funds idle.
In addition to managing the exchange rate of a country, the organization is responsible for the pricing of the currency that it trades. To do this, it calculates the “denomination spread”spot” price in relation to the current value of the currencies being traded. If a country’s foreign reserves are not sufficient to cover the amount of currency that it needs to trade, then it must purchase extra currency at the same rate as it trades it. To cover the difference between the cost and the value of the reserves, it must sell.
One example of the IEA’s role is related to IBM’s sale of its PC business. Before the sale was finalized, it was determined that IBM was in danger of going out of business due to its weak credit.
The IEA had been working with IBM since 1990 in developing a system that would protect the company from a possible collapse. The plan worked by having a third party periodically review the firm’s position and making recommendations as to what it thought would be the best course of action. In many cases, it had the potential to save the company.
In some cases, IBM would buy or loan money to pay for the costs of the third party review of its position. Other times, the company would borrow the money and put the profits back into the account to use for future negotiations with creditors and/or payments on the new accounts receivable and inventory accounts.
In the case of the PC sale of IBM, the third party made recommendations concerning the pricing of the International Exchange Rate. It recommended a lower than normal price because the new owners were concerned about IBM’s credit. This helped the buyers gain leverage in negotiations with their creditors.
Another example of the IEA’s responsibility for the market is that of the pricing of the dollar. For instance, if a country is about to make a major change in its currency policy, then the IEA’s goal is to make sure that the market price does not fall.
There is a possibility that the agency will be called upon to mediate between one country or two if international affairs are involved. In the case of the PC sale of IBM, the country where the company had a major presence was threatened with bankruptcy and so the IEA had the ability to mediate between the two.
A third example of the IEA’s responsibility is the monitoring of the movement of currency rates. In the case of the PC sale of IBM, the IEA had the ability to monitor the price fluctuations before they became known and then make adjustments to the exchange rates that could save the company.
As previously mentioned, IEA risk management is necessary for the protection of investors. There are many benefits to having the agency to handle all of the risks associated with the foreign markets.