Bài giảng International Business - Chapter eleven: Financial Forces

Financial ForcesMcGraw-Hill/IrwinInternational Business, 11/eCopyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.chapter elevenLearning ObjectivesExplain how money can be made and lost in the foreign exchange (FX) marketsUnderstand foreign exchange quotations, including cross ratesDescribe currency exchange controlsExplain how financial forces such as tariffs, taxes, inflation and the balance of payments can affect international management3Fluctuating Currency ValuesFreely floating currencies fluctuate against each otherFluctuations may be quite largeFinancial managers must understand how to protect against losses or optimize gains4Foreign Exchange TerminologyForeign Exchange QuotationThe price of one currency expressed in terms of another Reported in the world’s currency exchange marketsCentral reserve assetAsset, usually currency, held by a government’s central bankVehicle currencyA currency used as a vehicle for international trade or investmentIntervention currencyA currency used by a country to intervene in the foreign currency exchange markets, often to buy (strengthen) its own currency5Exchange RatesForeign 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)6Exchange Rate for June 19 and June 16, 20067Exchange RatesSpot ratesThe exchange rate between two currencies for delivery within two business daysForward currency marketTrading market for currency contracts deliverable 30, 60, 90, or 180 days in the futureForward rateThe exchange rate between two currencies for delivery in the future, usually 30, 60, 90, or 180 days8Exchange RatesTrading at a premiumA currency’s forward rate quote is stronger than the spot rateTrading at a discountA currency’s forward rate quotes is weaker than the spot ratePremium or a discount depends on the expectations of the world financial community, businesses, individuals, and governments about what the future will bring9Exchange RatesCross RatesCurrency exchange rates for trading directly between non-U.S. dollar currenciesBid pricePrice offered to buy Ask priceSales price10Influences of Exchange Rate FluctuationSupply and demand of the currencyInterest ratesInflationExpectations 11 Exchange Rate FluctuationMonetary policiesGovernment policies that control the amount of money in circulation and its growth rateFiscal policies Policies that address the collecting and spending of money by the governmentLaw of one priceConcept that in an efficient market, like products will have like pricesArbitrage The process of buying and selling instantaneously to make profit with no risk12Exchange Rate FluctuationFisher effect The relationship between real and nominal interest rates: the real interest rate will be the nominal interest rate minus the expected rate of inflationInternational Fisher effectConcept that the interest rate differentials for any two currencies will reflect the expected change in their exchange ratesPurchasing Power Parity (PPP)Theory that predicts that currency exchange rates between two countries should equal the ratio of the price levels of their commodity baskets13Exchange Rate ForecastingEfficient market approachAssumption that current market prices fully reflect all available relevant informationRandom walk hypothesis Assumption that the unpredictability of factors suggests that the best predictor of tomorrow’s prices is today’s prices14Exchange Rate ForecastingFundamental approachExchange rate prediction based on econometric models that attempt to capture the variables and their correct relationshipsTechnical analysisAn approach that analyzes data for trends and then projects these trends forward15Currency Exchange ControlsGovernment controls that limit the legal uses of a currency in international transactionsValue of currency is arbitrarily fixed at a rate higher than its market valueIf you see “official rate” next to a currency rate quotation, that country has currency exchange controls in place16Currency Exchange ControlsA black market typically surfaces as a result of currency exchange controlsHowever, this type of currency exchange transaction is illegalThe black market is rarely able to accommodate transactions of the size involved in international business17TariffsTariffs Taxes, usually on imported goodsMay be ad valorem, specific, compound, or variable18TaxationIncome taxDirect tax on personal and corporate incomeValue-added tax (VAT)A tax charged on the value added to a good as it moves through production from raw materials to final purchaserWithholding tax Indirect tax levied on passive income that the corporation would pay out to non residents19Corporate Tax Rates20InflationA trend of rising pricesMay be caused by demand exceeding supplyMay be caused by an increase in the money supplyMeasured by consumer price index (CPI)Basket of consumer goodsGross domestic product deflator--OECDTakes into account the prices of intermediate goods and services21GDP Deflator. Average annual growth in percentage, 1991-200422Inflation and the International CompanyHigh inflation ratesMake capital expenditure planning more difficultCause the cost of goods and services to riseTend to cause BOP deficitsCould lead to more restrictive fiscal or monetary policies, currency controls, export incentives, and import obstacles23Inflation and the International CompanyHigh inflation ratesEncourage borrowing because the loan will be repaid with cheaper moneyBring high interest rates Discourage lendingMake capital expenditure planning more difficult24Balance of Payments (BOP)The state of a nation’s BOP reveals the state of that country’s economyIf the BOP is slipping into deficitthe government is probably considering one or more market or nonmarket measures to correct or suppress that deficitCurrency devaluation or restrictive monetary or fiscal policies to induce deflation are likelyCurrency or trade controls may be near25