International Business Environments & Operations PDF

International Business Environments & Operations 15e, Global Edition Daniels Radebaugh Sullivan Copyright © 2015 Pearson Education Ltd. 9-1  Chapter 9 Factors that Influence Exchange Rates...

International Business Environments & Operations 15e, Global Edition Daniels Radebaugh Sullivan Copyright © 2015 Pearson Education Ltd. 9-1  Chapter 9 Factors that Influence Exchange Rates 9-2 Copyright © 2015 Pearson Education Ltd.  Learning Objectives  Describe the International Monetary Fund and its role in the determination of exchange rates  Discuss the major exchange-rate arrangements that countries use  Explain the European Monetary System and how the euro became the currency of the euro zone  Identify the major determinants of exchange rates  Show how managers try to forecast exchange- rate movements  Explain how exchange-rate movements influence business decisions Copyright © 2015 Pearson Education Ltd. 9-3  Introduction Learning Objective: Describe the International Monetary Fund and its role in the determination of exchange rates 9-4 Copyright © 2015 Pearson Education Ltd.  The International Monetary Fund  The goals of the International Monetary Fund (IMF) are to ensure stability in the international monetary system promote international monetary cooperation and exchange-rate stability facilitate the balanced growth of international trade provide resources to help members in balance- of-payments difficulties or to assist with poverty reduction Copyright © 2015 Pearson Education Ltd. 9-5  The International Monetary Fund  The Bretton Woods Agreement established a par value, or benchmark value, for each currency initially quoted in terms of gold and the U.S. dollar  The dollar became the world benchmark for trading currencies and continues in that role today Copyright © 2015 Pearson Education Ltd. 9-6  IMF  The Quota System every member contributes a quota  Assistance Programs the IMF lends money to ease balance-of- payments difficulties  Special drawing rights (SDRs) the IMF’s unit of account Copyright © 2015 Pearson Education Ltd. 9-7  Hard Peg, Soft Peg, or Floating Learning Objective: Discuss the major exchange-rate arrangements that countries use Copyright © 2015 Pearson Education Ltd. 9-8  Hard Peg, Soft Peg, or Floating  The IMF classifies currencies into three categories  Hard peg value is locked into something and does not change dollarization currency boards  Soft peg more flexible than hard peg Chinese Yuan is an example  Floating floating or free floating change according to market forces Copyright © 2015 Pearson Education Ltd. 9-9  The Euro Learning Objective: Explain the European Monetary System and how the euro became the currency of the euro zone Copyright © 2015 Pearson Education Ltd. 9-10  The Euro  The European Monetary System (EMS) established to create exchange rate stability within the European Community  The European Central Bank (ECB) sets monetary policy for the adopters of the euro Copyright © 2015 Pearson Education Ltd. 9-11 Determining Exchange Rates Learning Objective: Identify the major determinants of exchange rates Copyright © 2015 Pearson Education Ltd. 9-12  Determining Exchange Rates  Currency in a floating rate world demand for a country’s currency is a function of the demand for that country’s goods and services and financial assets Copyright © 2015 Pearson Education Ltd. 9-13  Determining Exchange Rates  Currency in a fixed rate or managed floating rate world Role of central banks  reserve assets  intervening in the market  attitudes toward intervention The Bank for International Settlements (BIS)  the central banks’ bank  coordinates central bank intervention Copyright © 2015 Pearson Education Ltd. 9-14  Black Markets  A black market closely approximates a price based on supply and demand for a currency instead of a government controlled price Copyright © 2015 Pearson Education Ltd. 9-15  Foreign Exchange Convertibility and Controls  Hard currencies U.S. dollar, euro, British pound, Japanese yen  Soft currencies developing countries  Countries can control convertibility through licenses multiple exchange rate systems advance import deposits quantity controls Copyright © 2015 Pearson Education Ltd. 9-16  Exchange Rates and Purchasing Power Parity  Purchasing power parity (PPP) a change in relative inflation between two countries must cause a change in exchange rates to keep the prices of goods in the countries fairly similar  The Big Mac Index Copyright © 2015 Pearson Education Ltd. 9-17  Exchange Rates and Interest Rates  The Fisher Effect links inflation and interest rates  The International Fisher Effect (IFE) links interest rates and exchange rates  Other Factors in Exchange Rate Determination confidence information Copyright © 2015 Pearson Education Ltd. 9-18  Forecasting Exchange Rate Movements Learning Objective: Show how managers try to forecast exchange-rate movements Copyright © 2015 Pearson Education Ltd. 9-19 Fundamental and Technical Forecasting  Forecasting exchange rates Fundamental forecasting  uses trends in economic variables to predict future rates Technical forecasting  uses past trends in exchange rates to spot future trends Biases can skew forecasts Timing, direction, and magnitude of exchange rate movements are important to consider Copyright © 2015 Pearson Education Ltd. 9-20  Fundamental Factors to Monitor  Monitor The institutional setting Fundamental analyses Confidence factors Circumstances Technical analyses Copyright © 2015 Pearson Education Ltd. 9-21  Business Implications of Exchange Rate Changes Learning Objective: Explain how exchange-rate movements influence business decisions Copyright © 2015 Pearson Education Ltd. 9-22  Business Implications of Exchange Rate Changes  Marketing Decisions when the value of a country’s currency rises, exporting becomes more difficult as the product becomes more expensive in foreign markets  Production Decisions might locate production in a weak currency country because the initial investment is cheap and it will make a good base for exports  Financial Decisions currency rates influence sourcing, cross-border remittance of funds, and the reporting of financial results Copyright © 2015 Pearson Education Ltd. 9-23  Foreign Exchange Risk Management  Types of Exposure Translation exposure Transaction exposure Economic (or Operating) exposure N.B: Refer to Chapter 19 in assigned textbook for detailed explanation of addressed three types of exposure Copyright © 2015 Pearson Education Ltd. 19-24