international business chapter 10
TRANSCRIPT
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International Business
Environments and Operations
Part 4
World Financial Environment
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Chapter 10
The
Determination
of Exchange
Rates
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Chapter Objectives
To describe the international monetary fund and itsrole in the determination of exchange rates
To discuss the major exchange-rate arrangements
that countries use To explain how the European monetary system
works and how the euro became the currency of theeuro zone
To identify the major determinants of exchange rates To show how managers try to forecast exchange-rate
movements
To explain how exchange rate movements influencebusiness decisions
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International Monetary Fund
Objectives of the IMF
To ensure stability in the international monetary
system To promote international monetary cooperation
and exchange-rate stability
To facilitate the balanced growth of international
trade To provide resources to help members in balance-
of-payments difficulties or to assist with poverty
reduction
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The Bretton Woods Agreement
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.
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The IMF Today
The Quota System
Assistance Programs
Special Drawing Rights (SDRs)
The Global Financial Crisis and the SDR
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Evolution to Floating Exchange
Rates
The Smithsonian Agreement
8% devaluation of the dollar
Revaluation of other currencies
Widening of exchange rate flexibility
The Jamaica Agreement
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Exchange Rate Arrangements
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Exchange Arrangements with No
Separate Legal Tender Dollarization
Currency Board Arrangements
Pegged Arrangements
More Flexible Arrangements
Crawling Pegs
Managed Float Independently Floating
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Exchange Rates: The Bottom Line
Countries may change the exchange-rate
regime they use, so managers need to
monitor country policies carefully.
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What is really the bottom line in the preceding discussion, and why
should managers be concerned about these issues?
In the first place, the world can be divided into countries that basicallylet their currencies float according to market forces with minimal or no
central bank intervention and those that do not but rely on heavy
central bank intervention and control.
Second, anyone involved in international business needs to
understand how the exchange rates of countries with which they do
business are determined, because exchange rates affect marketing,
production, and financial decisions It is important for MNEs to
understand the exchange-rate arrangements for the currencies of
countries where they are doing business so they can forecast trends
more accurately.
It is much easier to forecast a future exchange rate for a relatively
stable currency pegged to the U.S. dollar, such as the Hong Kong
dollar, than for a currency that is freely floating, such as the Japanese
yen.
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The Euro
The European Monetary System and the
European Monetary Union
Pluses and Minuses of the Conversion to theEuro
The Euro and Global Financial Crisis
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The Chinese Yuan
Playing it SAFE
The Global Financial Crisis and the Future of
the CNY
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Determining Exchange Rates
Non-intervention: Currency in a floating rate
world
Intervention: Currency in a fixed rate ormanaged floating rate world
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The Role of Central Banks
Central Bank Reserve Assets
How Central Banks Intervene in the Market
Different attitudes toward intervention Challenges with intervention
Revisiting the BIS
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Black Markets
A black market closely approximates a
price based on supply and demand for a
currency instead of a governmentcontrolled price.
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Foreign Exchange Convertibility andControls
Hard and soft currenciesHard currency
is a currency that is usually fully convertible
strong or relatively stable in value, over a short period of time in comparison with other currencies
highly liquid
generally worldwide accepted a payment for good and services
desirable assets
Soft currency
usually not fully convertible and
also called a weak currency
unstable in value
not very liquid
not widely accepted as payment for exports/imports
Controlling Convertibility
To conserve scarce foreign exchange, some govts impose exchange restrictions onindividuals/companies who want to exchange money.
Licensing
Multiple Exchange Rates
Import Deposits
Quality Controls
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Exchange Rates and Purchasing
Power Parity
The Big Mac Index
Short Run problems that affect PPP
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Exchange Rates and Interest
Rates The Fisher Effect
The InternationalFisher Effect
Other Factors in Exchange RateDetermination
Confidence
Information
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Forecasting Exchange Rate
Movements Fundamental and Technical Forecasting
Dealing with biases
Timing, Direction, Magnitude
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Fundamental Factors to Monitor
Institutional Setting
Fundamental Analyses
Confidence Factors Circumstances
Technical Analyses
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Business Implications of
Exchange Rate Changes
Marketing Decisions
Production Decisions Financial Decisions
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Future:
Latin America
Emerging market currencies should strengthen as
commodity prices recover
Europe
The euro is gaining popularity and will take market
share away from the dollar as the prime reserve
asset
Asia China is moving forward to establish the yuan as a
major world currency
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