IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history
In 1971 the US suspended dollar convertibility into gold, and by 1973 major currencies were floating. What was the main consequence for firms and financial services?
After Bretton Woods ended and major currencies floated, exchange-rate volatility rose, so firms and financial institutions faced greater currency risk and demanded more hedging tools such as forwards and futures, boosting financial derivatives markets.
- AExchange-rate risk increased, raising demand for hedging instruments such as currency forwards and futuresCorrect
- BExchange rates became permanently fixed, removing the need for hedging
- CCapital controls were universally tightened
- DCentral banks lost all ability to influence interest rates
- International trade in goods ceased to be priced in dollars
Explanation
With the end of fixed parities, currency values fluctuated, exposing exporters, importers and investors to exchange-rate risk. This stimulated growth of currency derivatives and risk-management services. The other options contradict the shift to floating or overstate its effects.
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