copyright © 2013 pearson education, inc. publishing as prentice hall 10-1 international business...

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

10-1

International Business

Environments & Operations

14e

Daniels ● Radebaugh ● Sullivan


10-2

Chapter 10

The Determination of Exchange Rates


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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


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IntroductionLearning Objective 1: To describe the International MonetaryFund and its role in the determination ofexchange rates


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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


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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


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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


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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


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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 provided greater exchange rate flexibility eliminated the use of par values


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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


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Exchange Rate Arrangements

Exchange Rate Arrangements and Anchors


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Three Choices: Hard Peg, Soft Peg, or

FloatingLearning Objective 2: To discuss the major exchange rate arrangements that countries use


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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


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The EuroLearning Objective 3: To explain how the European Monetary System works and how the euro became the currency of the euro zone


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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


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Determining Exchange Rates

Learning Objective 4: To identify the major determinants of exchange rates


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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


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The Equilibrium Exchange Rate and How it Moves


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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


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Black Markets A black market closely approximates a

price based on supply and demand for a currency instead of a government controlled price


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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


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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


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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


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Forecasting Exchange Rate MovementsLearning Objective 5: To show how managers try to forecast exchange-rate movements


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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


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Fundamental Factors to Monitor

Monitor The institutional setting Fundamental analyses Confidence factors Events Technical analyses


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Business Implications of Exchange Rate Changes

Learning Objective 6: To explain how exchange rate movements influence business decisions


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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


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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


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copyright © 2013 pearson education, inc. publishing as prentice hall 10-1 international business...

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