© 2010 Cengage Learning. All rights reserved. CHAPTER 7 GLOBAL  PENG.

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© 2010 Cengage Learning. All rights reserved. CHAPTER 7 GLOBAL  PENG

© 2010 Cengage Learning. All rights reserved. Chapter 7 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1.List the factors that determine foreign exchange rates. 2.Articulate and explain the steps in the evolution of the international monetary system. 3.Identify strategic responses firms can take to deal with foreign exchange movements. 4.Identify three things you need to know about currency when doing business internationally.

© 2010 Cengage Learning. All rights reserved. LO1: WHAT DETERMINES FOREIGN EXCHANGE RATES?

© 2010 Cengage Learning. All rights reserved. LO2: THE EVOLUTION OF THE INTERNATIONAL MONETARY SYSTEM  The Gold Standard ( ) Gold used as common denominator  The Bretton Woods system ( ) US dollar as common denominator  The Post-Bretton Woods System (1973- present) No common denominator; diversity of exchange rates.

© 2010 Cengage Learning. All rights reserved. LO2: THE EVOLUTION OF THE INTERNATIONAL MONETARY SYSTEM International Monetary Fund (IMF)  Legacy of Bretton Woods System  Lender of last resort for countries with balance of payments problems. Loans typically require long-term policy reforms.  Each member country assigned a quota that determines required contribution.

© 2010 Cengage Learning. All rights reserved. LO3: STRATEGIC RESPONSES TO FOREIGN EXCHANGE MOVEMENTS Strategies for Financial Companies  Main goal – to profit from foreign exchange market.  Spot transactions – single-shot exchange of one currency for another.  Forward transactions –purchase or sale of currencies for future delivery.  Currency swap – conversion of one currency into another at Time 1, with agreement to revert it back to original currency at Time 2 in the future.

© 2010 Cengage Learning. All rights reserved. LO3: STRATEGIC RESPONSES TO FOREIGN EXCHANGE MOVEMENTS Strategies for Non-Financial Companies  Currency hedging – a transaction that protects trades and investors from exposure to the fluctuations of the spot (daily) exchange rate.  Strategy hedging – spreading out activities in a number of countries in different currency zones to offset losses in any one region.

© 2010 Cengage Learning. All rights reserved. DEBATE: STRONG vs. WEAK DOLLAR Strong dollar: Rest of the world holds so many dollars. Many countries prefer to keep the value of their currenciesdown to promote exports. Weak dollar: Helps remedy the US balance of payments. Results in more global balancing. Forces Asian and European markets to boost domestic demand

© 2010 Cengage Learning. All rights reserved. LO4: THREE THINGS TO DO