1. © 2011 South-Western | Cengage Learning Foreign Exchange and International Finance 7-1 7-1Money Systems Around the World 7-2 7-2Foreign Exchange And Currency Controls 7-3 7-3Currency Transactions Between Nations CHAPTER 7

2. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 2 7 LESSON 7-1 Money Systems Around the World GOALS Explain the role of money and currency systems in international business. Identify factors that affect the value of currency.

3. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Money and Currency Systems What is Money? Money-is anything people will accept for the exchange of goods and services. There are 200 slang terms for money in English: 1. Food Dough Cheddar Bread 2. Colors Green Gold Greenbacks SLIDE 3 7

4. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Five Main Characteristics of Money 1. Acceptability 1. People be willing to take an item in exchange for what they are selling 2. Scarcity 1. If the item being used as money is very plentiful, it will not maintain its value. As items used for money become common, they lose their buying power 3. Durability 1. Gold and silver are commonly used as money because of durability. People used to use farm products that went bad and had terrible durability 4. Divisibility 1. Being able to divide an amount of something (.25 of.50) divisible amount 5. Portability SLIDE 4 7

5. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Which of those characteristics would make the following NOT practical to use as money 1. Shells 2. Works of Art 3. Produce (fruits and vegetables) 4. Diamonds SLIDE 5 7

6. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Why is Money Used? Three Main Purposes 1. Medium of Exchange-money is useful only if people are willing to accept it in exchange for goods and services. As a medium of exchange, money makes business transactions easier. At a store, you know you can use coins, currency or checks rather than having to trade a good or service. 2. Measure of Value-If you work four hours, is your time worth dinner at a restaurant or a pair of jeans? Allows us to put values on goods and services. Money makes it possible to compare prices for different items so you can make the wisest spending decisions. 3. Store of Value-Store your money for the future. Increase in product prices. 4. SLIDE 6 7

7. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 7 7 Foreign Exchange The process of converting the currency of one country into the currency of another country

8. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Exchange Rate -is the amount of currency of one country that can be traded for one unit of the currency of another country SLIDE 8 7

9. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Three Factors determine currency 1. Balance of Payments (what is that?) 2. Economic Conditions Buying power Interest rate Money supply and demand Risk Inflation 3. Political Stability SLIDE 9 7

10. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 10 7 LESSON 7-2 Foreign Exchange and Currency Controls GOALS Discuss foreign exchange activities. Describe the main activities of the World Bank and the International Monetary Fund.

11. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 11 7 Currency Soft currency-a currency that is not easy to exchange for other currencies ; weak currencies usually from developing economies tend to fall in value due to political uncertainty and economic stability. Currencies that are accepted for most global transactions: Japanese Yen Canadian Dollar Euro Swiss Franc U.S. Dollar Hard currency-monetary unit that is freely converted into other currencies also referred to as strong currencies

12. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Changing Exchange Rates Floating Exchange Rates-is a system in which currency values are based on supply and demand. When a country exports large amounts of goods and services, companies in that nation want payments in their own currency. To make these payments, buyers must purchase this monetary unit. As the demand for the currency increases, the value of the monetary unit also increases. SLIDE 12 7

13. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Changing Exchange Rates cont’ Ex. For most of the 1980’s Japan had a very favorable balance of payments as a result of high foreign demand for its automobiles, electronic products, and other goods. Because Japan companies wanted payment in yen, importers in other countries had to buy yen in order to make their payments. This demand for Japanese currency resulted in its increased value. In recent years, the yen has varied in value compared to U.S. dollar as a result of changing economic conditions in Japan. SLIDE 13 7

14. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 14 7 Japanese Yen Per U.S. Dollar

15. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Foreign Exchange Market is the network of banks and other financial institutions that buy and sell different currencies. Most large banks are part of the foreign exchange market and may provide currency services for businesses and consumers. If a company knows in the future they will be needing a specific currency they can make an agreement to buy that monetary unit later at the price it is now. Currency option-contract a person or company buys that allows the buyer the option to purchase a foreign currency sometime in the future at today’s rate. SLIDE 15 7

16. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Foreign Exchange Controls To maintain the value of its currency, a nation may limit the flow of money out of the country. Exchange controls-are government restrictions to regulate the amount and value of a nation’s currency. These controls can be either a fixed exchange rate or a limit on the amount and cost of currency. A common exchange control limits the amount of local currency a person can take out of a country. SLIDE 16 7

17. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 17 7 International Financial Agencies The World Bank International Monetary Fund (IMF)

18. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning The World Bank International Bank for Reconstruction and Development commonly called the World Bank Bank whose major function is to provide economic assistance to less developed countries Funds building communication systems, transportation networks and energy plants Has over 180 members and has two main divisions: The International Development Association International Finance Corporation SLIDE 18 7

19. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning The International Development Association Makes funds available to help developing countries. These loans can be paid back over many years (up to 50) SLIDE 19 7

20. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning International Finance Corporation Provides capital and technical assistance to businesses in nations with limited resources. Encourages joint ventures between foreign and local companies to encourage capital investment within developing nations SLIDE 20 7

21. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning International Monetary Fund (IMF) Is an agency that helps to promote economic cooperation by maintaining an orderly system of world trade and exchange rates Established in 1946 when economic interdependence among nations was escalating at a greater pace than ever before in history SLIDE 21 7

22. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Continued Before the IMF countries could frequently change the value of its currency to attract more foreign customers. Then as other countries lost businesses, they would impose trade restrictions or lower the value of their currency. A trade war resulted as one country tried to out do the other. To prevent this situation, the IMF has three main duties 1. Analyze economic situations (monitor a country’s trade, borrowing, and government spending) 2. Suggest economic policies (suggest actions to improve the situation) 3. Provide Loans (low interest loans to provide to a country who has a lot of foreign debt) SLIDE 22 7

23. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 23 7 LESSON 7-3 Currency Transactions Between Nations GOALS Discuss payment methods and financial sources for international business transactions. Explain other payment methods and financial documents used in international trade.

24. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 24 7 International Financial Transactions Foreign trade payment methods Cash in advance Letter of credit Sale on account

25. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Cash in advance Risky for the buyer You might not receive the items or you might have difficulty obtaining a refund Not often used Used most likely for first time buyers, small orders, customers in high-risk countries SLIDE 25 7

26. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Letter of Credit Letter of credit-is a financial document issued by a bank for an importer in which the bank guarantees payment Importer pays for goods before they are received but after the goods are shipped Issued by the importers bank promises to pay the exporter a set amount when certain documents are presented Prior payment, certain documents usually including a bill of lading- must be presented as proof that the goods have been shipped SLIDE 26 7

27. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Sale on Account This means regular customers have a certain time period to make payment, usually 30 to 60 days Credit terms-describe the time required for payment and other conditions of a sale on account When selling on account a company can encourage fast payment by offering a discount In the United States, companies can sell on account with credit terms of 2/10, n/30.* This means that customers can take a 2 percent discount if they pay within 10 days or pay the net (full) amount in 30 days. SLIDE 27 7

28. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning continued Another example is 1/15, n/EOM* This means a 1 percent discount may be taken if paid in 15 days. The net amount is due by the end of the month (EOM). SLIDE 28 7

29. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Sources of International Financing This is referred to as financing. Financing can be either short-term (one year or less) or long-term (more than one year). Short-Term Long-Term Some businesses activities require financing for more than one year Companies commonly need large sums of money for expensive business projects that will occur over several years Ex. A Japanese company need funds to build a manufacturing plant in Canada, or a German company wants to buy a food company in Mexico These long-term expensive projects are called capital projects. SLIDE 29 7

30. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Capital Projects Cost in the millions A bond is usually issued for these as well Bond-a certificate representing money borrowed by a company over a long period of time, usually between 5 to 30 years. SLIDE 30 7

31. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 31 7 Other Payment Methods and Financial Documents 1. Promissory Note Document that states a promise to pay a set amount by a certain date Signed by buyers to confirm their intention to make payments Also includes date to be paid and interest charges 2. Bill of Exchange Written order by an exporter to an importer to make payment Instructions include the amount, the due date, the location of where to make the payment, usually a bank or financial institution

32. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning Continued 1. Electronic Funds Transfer Moving payment through banking computer system 2. Commercial Invoice Prepared by the exporter, provides a description of the merchandise and the terms of sale (Example on next slide) 3. Insurance Certificate Explains the amount of insurance coverage for fire, theft, water, or other damage that may occur to goods in shipment SLIDE 32 7

33. INTERNATIONAL BUSINESS, 4e CHAPTER © 2011 South-Western | Cengage Learning SLIDE 33 7 A Commercial Invoice