Foreign Exchange: Dealing with Currencies - PowerPoint PPT Presentation

Loading...

PPT – Foreign Exchange: Dealing with Currencies PowerPoint presentation | free to view - id: 578440-ZDhlN



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Foreign Exchange: Dealing with Currencies

Description:

... Hedging Strategy Summary This feature examines the effects of Volkswagen s decision to not properly hedge its foreign exchange exposure in 2003. – PowerPoint PPT presentation

Number of Views:941
Avg rating:3.0/5.0
Slides: 39
Provided by: gregb83
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Foreign Exchange: Dealing with Currencies


1
Foreign Exchange Dealing with Currencies
  • with a basic introduction to the International
    Monetary System

9-1
2
Foreign Exchange Terms
  • Foreign exchange money denominated in the
    currency of another nation or group of nations
  • Cash
  • Credit
  • Bank deposits
  • Other short-term claims (e.g., bonds)
  • Exchange rate the price of a particular currency
    relative to another

3
Basic questions
  • What is money?
  • How should you convert money from one currency
    into another?
  • How are the values of currencies set?
  • How can you limit foreign exchange risk (the
    possibility that unpredicted changes in exchange
    rates will have adverse consequences for the
    firm)?
  • Can you predict when currency values will change?
    If so, how?

4
What is money?
  • The medium of exchange
  • that is, something widely accepted as means of
    payment
  • Usually, governments declare certain pieces of
    paper (and bank assets) to be money
  • But people must accept them
  • Alternatives are inconvenient, but possible
  • Tobacco in early American colonies
  • U.S. dollar in Russia when ruble collapsed

5
  • If you sell abroad, and you may receive payment
    in foreign currency
  • Buy abroad, and you may have to pay in foreign
    currency
  • Travel abroad, you must spend foreign currency
  • A foreign direct investment will have to pay
    expenses in foreign currency

6
How should you convert money from one currency
into another?
  • Current values of major foreign currencies are
    available on the Web
  • Most businesspeople normally buy from or sell to
    a bank
  • The bank often gives less than the rates offered
    on the Web, but handles all details
  • Banks may vary a lot in how good a deal they give
  • But they know they have to be competitive with
    other banks

7
  • A business with significant foreign activity
    creates a stable relationship with one or a few
    banks
  • Nowadays, you can do your own currency trading

8
(No Transcript)
9
How are the values of currencies set?
  • There are two basic ways
  • Fixed or Pegged exchange rates
  • Governments decide the value of currency
  • Example Hong Kongs government keeps the value
    of its dollar at roughly US0.129 (US1HK7.75)
  • With a fixed rate, there is absolutely no
    variability.
  • A pegged rate implies small variability

10
The major developed-country currencies float
against each other
  • Supply and demand sets values
  • This is how exchange rates are set for the US
    dollar vs.
  • Euro,
  • Japanese yen,
  • British pound,
  • Swiss franc, etc.

11
(No Transcript)
12
Fixed exchange rates have important benefits
  • They make business predictable
  • In some very prosperous periods, most major
    exchange rates have been fixed
  • The late 19th century
  • 1945-1971

13
The gold standard made the benefits of fixed
rates clear
  • Before WW I, all major currencies were
    convertible into gold
  • UK 1113 grains gold (.2354 oz)
  • US 1 23.22 grains (.0484 oz)
  • So, 14.87
  • Everyone knew what everything was and would be
    worth

14
  • But a fixed exchange rate requires discipline in
    the government and a willingness to create
    pain
  • Example Suppose your nations economy is very
    prosperous, but exports are growing only slowly
  • Your people will have money to buy imports
  • Their demand for foreign currencies will put
    upward pressure on their exchange rates
  • Government has to slow the domestic economy to
    prevent change in exchange rate
  • Higher taxes, higher interest rates, lower
    government spending

15
  • Many economists say if a country is having
    difficulty maintaining a fixed exchange rate, the
    economy is overheated
  • They say higher interest rates or higher taxes
    might be better for the economy in the long run
    in those circumstances
  • But politicians dont like to take pain
  • U.S. abandoned fixed exchange rates when the
    Vietnam War created strong inflation

16
  • It seems that the more complicated an economy,
    the more difficult it is to maintain fixed/pegged
    rates
  • Many small countries succeed
  • Hong Kong, Bangladesh, Fiji
  • Few propose them for the largest developed
    countries today
  • Many developing countries including China
    restrict who can own their money
  • Hot investments in emerging currencies have
    often caused problems when foreigners changed
    their minds

17
  • China maintains a pegged exchange rate
  • For long periods it kept the rate at less than an
    equilibrium price
  • Its government had to buy lots of surplus dollars
    that its exports brought in
  • In June 2012 China had 3,240 billion US dollars

18
When an economy has recently grown, it may be
hard to spend
  • There is poor transportation infrastructure
  • People live in the countryside or in tiny urban
    apartments, so they have little space for things
  • So more money may come in from exports than
    people want to spend

19
  • Its easier to manage a currencys level if you
    have a trade surplus than a trade deficit
  • You can simply use the surplus to buy up the
    foreign exchange that comes into the country
  • China fears that if the value of the Yuan rises,
    declining sales of manufacturers will hurt
    employment

20
  • US per capita GDP is 48,400
  • Chinas per capita GDP at current Yuan exchange
    rate is 5400
  • Thus, a US worker must ordinarily be 9 times as
    productive as a Chinese worker to sell
    internationally
  • Chinas nominal per capita income up 46 in 3
    years!
  • For the US and Europe, a low Yuan and Chinese
    import restrictions make recovery from recession
    harder
  • But Americans get to consume more

21
(No Transcript)
22
Most international business involves currencies
with floating rates
  • Buyers and sellers establish prices in markets
    like those for tea and wheat
  • 1,200,000,000,000 in foreign exchange is traded
    every day
  • US dollar is most widely traded
  • involved in 90 of all transactions
  • London is the main foreign-exchange market

23
Foreign-Exchange Trading Terms
  • Bid the rate at which a trader will buy foreign
    currency from you
  • Offer (or Ask) the rate at which a trader will
    sell foreign currency to you
  • Spread the difference between bid and offer
    rates the profit margin for the trader

9-6
24
Market Rhythms
9-13
25
(No Transcript)
26
Insuring Against Foreign Exchange Risk
  • Businesses use the foreign exchange market to
    provide insurance against foreign exchange risk
  • A firm that protects itself against foreign
    exchange risk is hedging
  • You can buy or sell using
  • spot exchange rates
  • forward exchange rates
  • currency swaps

27
Insuring Against Foreign Exchange Risk
  • 1. Spot Exchange Rates
  • The spot exchange rate is the rate at which a
    foreign exchange dealer converts one currency
    into another currency on a particular day
  • Spot rates are determined by the interaction
    between supply and demand, and so change
    continually

28
Insuring Against Foreign Exchange Risk
  • 2. Forward Exchange Rates
  • A forward exchange occurs when two parties agree
    to exchange currency at some specific future date
  • Forward rates are typically quoted for 30, 90, or
    180 days into the future
  • Forward rates are typically the same as the spot
    rate plus or minus an adjustment for the interest
    the parties will pay/receive

29
Insuring Against Foreign Exchange Risk
  • 3. Currency Swaps
  • A currency swap is the simultaneous purchase and
    sale of an amount of foreign exchange on two
    different 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
  • For example, you have accepted an order in
    Japanese yen and you must manufacture the product
    using components you must purchase in Japanese
    yen

30
(No Transcript)
31
How can you predict when currency values will
change?
  • Business decisions demand you look far ahead
  • If exchange rates will change and you dont hedge
    adequately, your whole calculation will be off
  • Some foreign currencies have lost 90 or more of
    their value in a year
  • Argentine peso went from 11 peso to 13.5
    pesos in one jump

32
Fundamental analysis involves examining basic
economic data
  • How fast are prices rising in the country?
  • Is there a trade surplus or deficit?
  • Is the government running budget deficits? How
    much?
  • How do interest rates in the countries compare?
  • How has the government been managing the
    currency?

33
Technical analysis involves examining trends in
exchange rates
  • One principle Trends once established often tend
    to continue
  • The trend is your friend
  • But if everyone agrees something will happen,
    it may not happen
  • When everyone thinks the dollar will go down,
    everyone has already sold dollars
  • If the news changes, many may quickly change
    their minds and want to buy

34
Foreign exchange can be the difference between
profit and loss
  • HSBC Bank in Argentina
  • They entered Argentina at a time when it appeared
    the government was starting to manage the economy
    effectively
  • But they continued investing as government became
    more irresponsible
  • They lost big

35
(No Transcript)
36
(No Transcript)
37
  • Material below here is not required

38
Foreign-Exchange Convertibility
  • Fully convertible currencies are those that the
    government allows both residents and nonresidents
    to purchase in unlimited amounts
  • Hard currencies are fully convertible
  • Soft currencies (or weak currencies) are not
    fully convertible
  • Typically from developing countries
  • Known as exotic currencies

9-10
About PowerShow.com