1. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-1 International Business Environments & Operations 14e Daniels ● Radebaugh ● Sullivan

2. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-2 Chapter 10 The Determination of Exchange Rates

3. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-3 Learning Objectives  To describe the International Monetary Fund and its role 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 the euro 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 influence business decisions

4. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-4 Introduction Learning Objective 1: To describe the International Monetary Fund and its role in the determination of exchange rates

5. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-5 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

6. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-6 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

7. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-7 The IMF Today  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

8. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-8 The Global Financial Crisis and the IMF  The global crisis in 2008-2009 raised concerns over global liquidity prompted the G20 to inject huge amounts of cash into the IMF  Greece’s 2010-2011 financial crisis required assistance from the IMF and the EU the IMF required Greece to adopt very unpopular austerity measures

9. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-9 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 provided greater exchange rate flexibility eliminated the use of par values

10. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-10 Exchange Rate Arrangements  Under the Jamaica Agreement countries selected and maintained their own exchange rate arrangements  The IMF monitors the exchange rate policies of countries to see if they are acting openly and responsibly

11. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-11 Exchange Rate Arrangements Exchange Rate Arrangements and Anchors

12. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-12 Three Choices: Hard Peg, Soft Peg, or Floating Learning Objective 2: To discuss the major exchange rate arrangements that countries use

13. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-13 Three Choices: Hard Peg, Soft Peg, or Floating  The IMF classifies currencies into three categories  Hard peg 12.2% of total value is locked into something and does not change dollarization currency boards  Soft peg 45.7% of total more flexible than hard peg  Floating 42.1% of total floating or freely floating

14. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-14 The Euro Learning Objective 3: To explain how the European Monetary System works and how the euro became the currency of the euro zone

15. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-15 The Euro  The European Monetary System (EMS) established to create exchange rate stability within the European Community  European Monetary Union (EMU) outlined the criteria for euro applicants  the U.K., Sweden, and Denmark opted not to adopt the euro  The European Central Bank (ECB) sets monetary policy for the adopters of the euro

16. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-16 Determining Exchange Rates Learning Objective 4: To identify the major determinants of exchange rates

17. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-17 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

18. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-18 Determining Exchange Rates The Equilibrium Exchange Rate and How it Moves

19. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-19 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

20. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-20 Black Markets  A black market closely approximates a price based on supply and demand for a currency instead of a government controlled price

21. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-21 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

22. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-22 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

23. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-23 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

24. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-24 Forecasting Exchange Rate Movements Learning Objective 5: To show how managers try to forecast exchange-rate movements

25. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-25 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

26. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-26 Fundamental Factors to Monitor  Monitor The institutional setting Fundamental analyses Confidence factors Events Technical analyses

27. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-27 Business Implications of Exchange Rate Changes Learning Objective 6: To explain how exchange rate movements influence business decisions

28. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-28 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

29. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-29 The Future: The Dollar, The Euro, The Yen, The Yuan  Europe the euro should take market share away from the dollar as the prime reserve asset assuming the problems in Greece and other countries are controlled  Asia China is moving forward to establish the yuan as a major world currency  Latin America emerging market currencies should strengthen as commodity prices recover

30. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10-30 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.