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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
10-1
International Business
Environments & Operations
14e
Daniels ● Radebaugh ● Sullivan
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
10-2
Chapter 10
The Determination of Exchange Rates
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10-3
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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10-4
IntroductionLearning Objective 1: To describe the International MonetaryFund and its role in the determination ofexchange rates
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10-5
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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10-6
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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10-7
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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10-8
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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10-9
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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10-13
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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10-14
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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10-15
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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10-17
Determining Exchange Rates
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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10-18
Determining Exchange Rates
The Equilibrium Exchange Rate and How it Moves
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10-19
Determining Exchange Rates
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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10-20
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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10-21
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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10-22
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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10-27
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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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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