TAILIEUCHUNG - Lecture International business (11/e) - Chapter 11: Financial forces

The main goals of this chapter are to: Explain how money can be made and lost in the foreign exchange (FX) markets; understand foreign exchange quotations, including cross rates; describe currency exchange controls; explain how financial forces such as tariffs, taxes, inflation and the balance of payments can affect international management. | Financial Forces McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. chapter eleven Learning Objectives Explain how money can be made and lost in the foreign exchange (FX) markets Understand foreign exchange quotations, including cross rates Describe currency exchange controls Explain how financial forces such as tariffs, taxes, inflation and the balance of payments can affect international management 11- Fluctuating Currency Values Freely floating currencies fluctuate against each other Fluctuations may be quite large Financial managers must understand how to protect against losses or optimize gains 11- Foreign Exchange Terminology Foreign Exchange Quotation The price of one currency expressed in terms of another Reported in the world’s currency exchange markets Central reserve asset Asset, usually currency, held by a government’s central bank Vehicle currency A currency used as a vehicle for international trade or investment Intervention currency A currency used by a country to intervene in the foreign currency exchange markets, often to buy (strengthen) its own currency 11- Exchange Rates Foreign currency X’s per US$ rate can be computed from the reciprocal of the US$ equivalent rate of currency X (and vice versa) Foreign Exchange Quotations / (Currency X per US$ rate) = = (US$ equivalent rate of currency X) (1) / (US$ equivalent rate of currency X) = = (Currency X per US$ rate) 11- Exchange Rate for June 19 and June 16, 2006 11- Exchange Rates Spot rates The exchange rate between two currencies for delivery within two business days Forward currency market Trading market for currency contracts deliverable 30, 60, 90, or 180 days in the future Forward rate The exchange rate between two currencies for delivery in the future, usually 30, 60, 90, or 180 days 11- Exchange Rates Trading at a premium A currency’s forward rate quote is stronger than the spot rate Trading at a .

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