INBS 250 INBS 250
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This 4 page Class Notes was uploaded by Maria Notetaker on Thursday September 15, 2016. The Class Notes belongs to INBS 250 at Montclair State University taught by Nahra in Spring 2015. Since its upload, it has received 8 views. For similar materials see Introduction to International Business in International Business at Montclair State University.
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Date Created: 09/15/16
Ch. 10 - Foreign Exchange Market Friday, March 6, 2015 11:32 AM Gold Standard (an established number of units per currency) Established after WWII Needed to have gold in treasury to have paper currency (how it measured initially) IMF (International Monetary Fund) 1945 o Concerned with the stability of the currencies globally o Interfere when economies of countries are falling apart and facing disasters o Special Drawing Rights currency that IMF came up with for their own budged 39% US dollar 36% Euro 13% Japanese yen 12% British pound An ounce of gold today is 1200 Bretton Woods System o US dollar fixed to $35 to the ounce In 1971, the US eliminated the convertibility of the US dollar to gold Two types of currencies globally: Hard currencies: governments and businesses globally are willing to trade in these currencies without any hesitation o US dollar o Euro o Japanese yen o British pound o Swiss franc Soft currencies: currencies of all the developing countries; can fluctuate a lot in value; businesses refuse to get paid in soft currencies (nonindustrial countries) * By gov. controlling the convertibility of its currency, it controls the market Systems/ways that gov. manage their currencies Free floating o The exchange rate will be determined by supply and demand without any intervention from the government o Values determined by market forces Peg (only done in developing countries) o Setting the exchange rate and it stays the same o By tying the value, gives more confidence in the marketplace o Ex: Saudi Arabia's currency is pegged to the dollar; Chinese yan is pegged to the dollar o Smaller countries that peg have to follow the rules/regulations of the central break (of main currency) Managed o Gov. interferes in the marketplace to buy and sell their own currency to impact that exchange rate o Ex: Japanese gov. buys billions of dollars to support the yen *Foreign exchange quotations/formulas Types of foreign exchange markets Spot market: price of today for delivery of 2 to 3 business days o Transactions occur on the spot Forward market: transactions ocurr at a set rate Bid: price at which a trader is willing to buy a foreign currency Offer: price at which a trader is willing to sell a foreign currency Spread: the difference between the bid and the offer rates o American terms o European terms Exchange Rate Fluctuation Fisher effect: relationship between real and nominal interest rate o Not only look at interest rate blindly, but also inflation Black Market: buying from a country that does not have your country's currency Where banks go to buy foreign currency: Chicago Mercantile Exchange Philadelphia Stock Exchange Central Banks In US made out of US dollars, bonds, gold (in ft. Knox) and foreign currencies that we trade with Decide on interest rates in the marketplace Supply money/print dollars and put it in the marketplace How managers can minimize exchange rate risk: Lead strategy: collect foreign currency receivables early when a foreign currency is expected to depreciate o Paying foreign currency payables before they are due when a currency is expected to appreciate Lag strategy: delay collection of foreign currency receivables is that currency is expected to appreciate o Delaying payables if the currency is expected to depreciate o *opposite of lead strategy
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