Expert Answer:review a article

Answer & Explanation:This is for a article review… please find a article that is not older than 6 months that can relate to the powerpoint for this week. This class is international business. Minimum one pageAll things international business are changing at a very rapid pace. For this assignment you will need to:(1) locate an article online that is less than six months old(2) properly quote the article in APA format(3) provide an overview of the article(4) make an explicit connection between the course readings and the article
20191104120656hill_gbt11e_ppt_ch10_accessible__1_.pptx

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Global Business Today 11e
by Charles W.L. Hill
and G. Tomas M. Hult
©VIPRESIONA/Shutterstock
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Part 4: The Global Monetary System
Chapter 10: The Foreign Exchange
Market
©McGraw-Hill Education
Source: ©PAUL J. RICHARDS/AFP/Getty Images
Learning Objectives
LO 10-1
Describe the functions of the foreign exchange market.
LO 10-2
Understand what is meant by spot exchange rates.
LO 10-3
Recognize the role that forward exchange rates play in
insuring against foreign exchange risk.
LO 10-4
Understand the different theories explaining how currency
exchange rates are determined and their relative merits.
LO 10-5
Identify the merits of different approaches toward
exchange rate forecasting.
LO 10-6
Compare and contrast the differences among translation,
transaction, and economic exposure, and explain the
implications for management practice.
©McGraw-Hill Education
Opening Case:
The Fluctuating Value of the Yuan Gives Chinese Business a
Lesson in Foreign Exchange Risk
Value of the yuan relative to the dollar fluctuated significantly
between 2015 to 2018
Yuan depreciated from 2015 to 2016

Boosted exports

Increased prices of key imports, which raised costs for companies and
resulted in losses
Yuan appreciated from 2017 to 2018

Reduced costs for companies that import goods priced in dollars

Raised price of exports
©McGraw-Hill Education
Introduction
The foreign exchange market is a market for converting
the currency of one country into that of another
country
An exchange rate is the rate at which one currency is
converted into another
©McGraw-Hill Education
The Functions of the Foreign Exchange Market 1
1. Enables the conversion of the currency of one
country into the currency of another
2. Provides some insurance against foreign exchange
risk—the adverse consequences of unpredictable
changes in exchange rates
©McGraw-Hill Education
The Functions of the Foreign Exchange Market 2
Currency Conversion
• To convert export receipts, income received from foreign
investments, or income received from licensing
agreements
• To pay a foreign company for products or services
• To invest spare cash for short terms in money markets
• For currency speculation: the short-term movement of
funds from one currency to another in the hopes of
profiting from shifts in exchange rates
• Carry trade borrows one currency where interest rates are low and
invests these in another currency where interest rates are high
©McGraw-Hill Education
The Functions of the Foreign Exchange Market 3
Insuring against Foreign Exchange Risk
• The foreign exchange market can provide insurance
against foreign exchange risk
• A firm that protects itself against foreign exchange risk is hedging
• The market performs this function using:
1. Spot exchange rates
2. Forward exchange rates
3. Currency swaps
©McGraw-Hill Education
The Functions of the Foreign Exchange Market 4
Insuring against Foreign Exchange Risk continued
• Spot Exchange Rates
• Rate at which a foreign exchange dealer converts one currency
into another currency on a particular day
• Determined by the interaction between supply and demand
• Changes continually
©McGraw-Hill Education
The Functions of the Foreign Exchange Market 5
Insuring against Foreign Exchange Risk continued
• Forward Exchange Rates
• The exchange rate governing a forward exchange
• A forward exchange occurs when two parties agree to exchange
currency and execute the deal at some specific date in the future
• Forward exchange rates are typically quoted for 30, 90, or 180
days into the future
• Can sometimes work against a company
©McGraw-Hill Education
The Functions of the Foreign Exchange Market 6
Insuring against Foreign Exchange Risk continued
• Currency Swaps
• Simultaneous purchase and sale of a given amount of foreign
exchange for two different value dates
• Swaps are used when it is desirable to move out of one currency
into another for a limited period without incurring foreign
exchange rate risk
©McGraw-Hill Education
The Nature of the Foreign Exchange Market
The foreign exchange market is a global network of
banks, brokers, and foreign exchange dealers
connected by electronic communications systems
• The market is always open somewhere in the world
• If exchange rates quoted in different markets were not
essentially the same, there would be an opportunity for
arbitrage—the process of buying a currency low and
selling it high
• Most transactions involve U.S. dollars on one side
• The U.S. dollar is a vehicle currency
©McGraw-Hill Education
Economic Theories of Exchange Rate Determination 1
Three factors have an important impact on future
exchange rate movements
1. A country’s price inflation
2. A country’s interest rate
3. Market psychology
©McGraw-Hill Education
Economic Theories of Exchange Rate Determination 2
Prices and Exchange Rates
• The Law of One Price
• In competitive markets free of transportation costs and barriers to
trade, identical products sold in different countries must sell for
the same price when price is expressed in terms of the same
currency
• Purchasing Power Parity (PPP)
• Given relatively efficient markets—markets in which few
impediments to international trade and investment exist—the
price of a “basket of goods” should be roughly equivalent in each
country
©McGraw-Hill Education
Economic Theories of Exchange Rate Determination 3
Prices and Exchange Rates continued
• Purchasing Power Parity continued
• PPP predicts that changes in relative prices will result in changes in
exchange rates
• When inflation is relatively high, a currency should depreciate
©McGraw-Hill Education
Economic Theories of Exchange Rate Determination 4
Prices and Exchange Rates continued
• Money Supply and Price Inflation
• If we can predict inflation rates, we can predict how a currency’s
value might change
• The growth of a country’s money supply determines its likely
future inflation rate
• When the growth in the money supply is greater than the growth
in output, inflation will occur
©McGraw-Hill Education
Effects of Inflation
An outdoor market
in Bolivia. Bolivia’s
inflation rate is
much lower today
than it was in 1985
but must be
carefully monitored.
©McGraw-Hill Education
Source: ©Noah Friedman-Rudovsky/Bloomberg/Getty Images
Economic Theories of Exchange Rate Determination 5
Prices and Exchange Rates continued
• Empirical Tests of PPP Theory
• Indicates it is not completely accurate in estimating exchange rate
changes in the short run but relatively accurate in the long run
• The purchasing power parity puzzle
• Assumes away transportation costs and barriers to trade
• Governments attempt to influence the value of their currencies
• Investor psychology plays a role on exchange rate movements
©McGraw-Hill Education
Economic Theories of Exchange Rate Determination 6
Interest Rates and Exchange Rates
• Fisher effect: a country’s nominal interest rate (i) is the
sum of the required real rate of interest (r) and the
expected rate of inflation over the period for which the
funds are to be lent (I)
• In other words:
i=r+I
• So, if the real interest rate is the same everywhere, any
difference in interest rates between countries reflects
differing expectations about inflation rates
©McGraw-Hill Education
Economic Theories of Exchange Rate Determination 7
Interest Rates and Exchange Rates continued
• International Fisher effect: for any two countries, the spot
exchange rate should change in an equal amount but in
the opposite direction to the difference in nominal
interest rates between the two countries
• In other words:
(S1 – S2) / S2 × 100 = i$ – i¥
where i$ and i¥ are the respective nominal interest rates in two
countries (in this case the U.S. and Japan), S1 is the spot exchange
rate at the beginning of the period and S2 is the spot exchange rate
at the end of the period
©McGraw-Hill Education
Economic Theories of Exchange Rate Determination 8
Investor Psychology and Bandwagon Effects
• Bandwagon effect occurs when expectations on the part
of traders turn into self-fulfilling prophecies, and traders
join the bandwagon and move exchange rates based on
group expectations
• Government intervention can prevent the bandwagon from
starting but is not always effective
©McGraw-Hill Education
Economic Theories of Exchange Rate Determination 9
Summary of Exchange Rate Theories
• Relative monetary growth, relative inflation rates, and
nominal interest rate differentials are all moderately good
predictors of long-run changes in exchange rates, but poor
predictors of short term changes
• So, international businesses should pay attention to
countries’ differing monetary growth, inflation, and
interest rates
©McGraw-Hill Education
Exchange Rate Forecasting 1
The Efficient Market School
• Efficient market is one in which prices reflect all available
information
• Forward exchange rates are the best predictors of future
spot exchange rates
• Investing in forecasting services is a waste of money
©McGraw-Hill Education
Exchange Rate Forecasting 2
The Inefficient Market School
• Inefficient market is one in which prices do not reflect all
available information
• Forward exchange rates are not the best predictors of
future spot exchange rates
• Companies should invest in forecasting services
©McGraw-Hill Education
Did You Know?
Did you know that the
U.S. dollar has been one
of the strongest
currencies in the world
since the great recession
of 2008–2009?
Click to play video
©McGraw-Hill Education
Exchange Rate Forecasting 3
Approaches to Forecasting
1. Fundamental analysis
• Draws upon economic factors like interest rates, monetary policy,
inflation rates, or balance of payments information to predict
exchange rates
2. Technical analysis
• Uses price and volume data to determine past trends that are
expected to continue
• Many economists are skeptical of technical analysis
©McGraw-Hill Education
Currency Convertibility 1
Various types of currencies
• Freely convertible: both residents and nonresidents can
purchase unlimited amounts of foreign currency with the
domestic currency
• Externally convertible: only nonresidents can convert
their holdings of domestic currency into a foreign currency
• Nonconvertible: both residents and nonresidents are
prohibited from converting their holdings of domestic
currency into a foreign currency
©McGraw-Hill Education
Currency Convertibility 2
Governments limit convertibility to preserve foreign
exchange reserves and prevent capital flight—when
residents and nonresidents rush to convert their
holdings of domestic currency into a foreign currency
In the case of a nonconvertible currency, firms may
turn to countertrade—barter-like agreements by which
goods and services can be traded for other goods and
services—to facilitate international trade
©McGraw-Hill Education
Focus on Managerial Implications 1
Foreign Exchange Rate Risk
• Firms must understand the influence of exchange rates on
the profitability of trade and investment deals
• Transaction exposure: extent to which the income from individual
transactions is affected by fluctuations in foreign exchange values
• Mainly concerned with short-term transactions
• Translation exposure: impact of currency exchange rate changes
on the reported financial statements of a company
• Economic exposure: extent to which a firm’s future international
earning power is affected by changes in exchange rates
• Concerned with the long-run effect of exchange rates on future
prices, sales, and costs
©McGraw-Hill Education
Focus on Managerial Implications 2
Reducing Translation and Transaction Exposure
• Buy forward
• Use swaps
• Lead Strategy
• Collect foreign currency receivables early when a foreign currency
is expected to depreciate
• Paying foreign currency payables before they are due when a
currency is expected to appreciate
• Lag Strategy
• Delay collection of foreign currency receivables if that currency is
expected to appreciate
• Delay payables if the currency is expected to depreciate
©McGraw-Hill Education
Focus on Managerial Implications 3
Reducing Economic Exposure
• Firms need to distribute productive assets to various
locations to avoid long-term financial problems associated
with changes in exchange rates
©McGraw-Hill Education
Focus on Managerial Implications 4
Other Steps for Managing Foreign Exchange Risk
1. Establish central control to protect resources efficiently
and ensure that each subunit adopts the correct mix of
tactics and strategies
2. Distinguish between transaction and translation exposure
on the one hand and economic exposure on the other
3. Attempt to forecast future exchange rates
4. Establish good reporting systems so the central finance
function can regularly monitor the firm’s exposure
position
5. Produce monthly foreign exchange exposure reports
©McGraw-Hill Education
Summary
In this chapter, we have

Described the functions of the foreign exchange market.

Understood what is meant by spot exchange rates.

Recognized the role that forward exchange rates play in insuring
against foreign exchange risk.

Understood the different theories explaining how currency exchange
rates are determined and their relative merits.

Identified the merits of different approaches toward exchange rate
forecasting.

Compared and contrasted the differences among translation,
transaction, and economic exposure, and what managers can do to
manage each type of exposure.
©McGraw-Hill Education

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