international business chapter 10

7/31/2019 international business chapter 10

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Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall10-1

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.



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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Copyright 2011 Pearson Education Inc publishing as Prentice Hall10-24

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international business chapter 10