International Business
Chapter 4
The International
Financial
Environments
Learning Outcomes
1.
Define foreign exchange clearly.
2. Define foreign exchange market clearly.
3. Identify the effects of exchange rate
fluctuation on international trading.
4. Identify the features of FOREX markets.
5. Identify the participants in FOREX.
6. Discuss the purposes of trading of FOREX.
7. Identify the functions of foreign exchange
market.
8. Discuss the main uses of foreign exchange
markets.
9. Identify the major foreign exchange
instruments in FOREX.
10. Define foreign exchange rate regimes.
11. Discuss the foreign exchange rate regimes.
12. Discuss the factors that determine exchange
4.1 The Foreign Exchange Market
rate changes.
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Learning Outcomes
1.
Describe Gold Exchange Standard.
2. Describe Bretton Woods Agreement.
3. Briefly explain the International Monetary Fund (IMF) and its
functions.
4. Briefly explain the World Bank and its functions
4.2 The International Monetary System
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Learning Outcomes
1.
Define global capital market clearly.
2. Describe functions of global capital markets.
3. Identify the attractions of global capital markets.
4. Discuss the growth of global capital markets in international business .
4.3 The Global Capital Markets
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4.1
The Foreign
Exchange Markets
Let’s start with the first set of slides
Foreign exchange
transactions
￮ Foreign exchange enables currencies to
be bought and sold for international
trading purposes.
￮ Currencies – Malaysian ringgit (RM), the
US dollar ($), etc.
￮ A foreign exchange transaction is a
mechanism to access foreign
currencies, so that payments for trade
can be made in a form that is
acceptable by both trading partners.
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Foreign exchange rates
An exchange rate is the rate at which one
currency can be exchanged for another.
This rate fluctuates and changes every
day, influenced by national events, and
demand and supply.
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Foreign exchange rates
The effects of exchange rate fluctuation
on international trading:
• Investment decisions
• Prices of exports and imports
• Price level of wage inflation
• Tourism patterns
• Buying decision
• Firm’s profits
• Nation’s economy
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Foreign Exchange
Market
Foreign exchange market is where currencies
from all over the world are being traded.
FOREX Market Participants and Features
• 2 main functions of FOREX
4 main uses of FOREX market in International Business
•
•
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FOREX market features
￮
High liquidity
￮
No central headquarters
￮
Buying and selling currencies
￮
Worldwide network
￮
24-hour trading
￮
Largest financial market
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FOREX market participants
￮
Banks
￮
Brokers
￮
Customers
￮
Retail forex traders
￮
Central banks
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2 main functions of FOREX
￮ To convert the currency of one country into other currencies.
￮ To provide insurance against foreign exchange risks,
adverse consequences of unpredictable changes.
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The purposes of trading in FOREX
￮ For import and export needs of
companies and individuals
￮ For foreign direct investment.
￮ To profit from short-term fluctuations
in exchange rates.
￮ To manage existing positions.
￮ To purchase foreign financial
instruments.
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4 main uses of foreign
exchange markets:
￮ The payments a company receives for its exports, the income it
receives from foreign investment, or the income it receives from
licensing agreements with foreign firms may be in foreign
currencies. To use those funds in its home country, the company
must convert them to its home country’s currency.
￮ International businesses use foreign exchange markets when
they must pay a foreign company for its products or services in its
country’s currencies.
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4 main uses of foreign
exchange markets:
￮ International businesses use foreign exchange markets when
they have spare cash that they wish to invest for short terms in
money markets.
￮ Currency speculation is another use of foreign exchange markets.
Currency speculation typically involves the short-term movement
of funds from one currency to another in the hopes of profiting
from shifts in exchange rates.
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Foreign exchange
instruments
Any type of a financial medium (such as bills of
exchange, bonds, currencies, stocks, etc.) that are
used for borrowing purposes in financial markets.
￮
The Spot Market
￮
The Forward Market
￮
Options
￮
Future Contracts
￮
OTC market
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Foreign exchange
instruments
The Spot Market
The Forward Market
Takes place at a spot
rate, which is the rate
at the time of
transaction.
Takes place at a
forward exchange rate
to minimize risks.
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Foreign exchange
rate regime
Definition
An exchange
rate regime
refers to the
method of
how a
currency is
being
managed in a
country.
Floating exchange
rate
Fixed exchange
rate
Also known as the
flexible exchange
rate.
A currency is
attached to
another currency
for its value.
It enablescurrency
value to fluctuate
based on market
demand.
￮ Limited gov.
intervention.
￮ Currency value
fluctuates
￮ Determined by
market S&D
￮ Value is fixed.
￮ Value is
matched to a
currency
￮ Gov. intervention.
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Factors that determine
exchange rate changes
￮ Political (political development, new tax
laws, government policies, central bank
policies)
￮ Economic (business cycles, balance of
payment, international investment
patterns)
￮ Psychological (stock market news,
inflationary expectations)
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4.2
The International
Monetary Systems
Let’s start with the next set of slides that
covers:
1.
Gold Exchange Standard
2. Bretton Woods Agreement
3. International Monetary Fund (IMF)
4. World Bank
Gold Exchange
standard
￮
Gold was used as a medium of exchange, which known as money.
￮
A monetary system that sought to restore features of the Gold Standard in the
1920s and again in the Bretton Woods System, while economizing on gold.
￮
Instead of money being backed directly by gold, central banks issued liabilities
against foreign currency assets (mostly U.S. dollars under Bretton Woods) that
were in turn backed by gold.
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Bretton Woods
Agreement
￮
Known as the adjustable-peg system required that each country value its
currency in terms of gold or the United States Dollar, which fixed the exchange
rate among all currencies.
￮
This system was replaced by the system of managed floating exchange rates
in 1973.
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International
monetary fund
￮
The purpose of IMF is to monitor financial structures and macroeconomic
situations of member countries.
￮
The goal of IMF is to:
￮ Encourage cooperation in the international monetary arena by having a stable and
￮
￮
recognized international organization through discussion and collaboration on
issues and problems in international monetary areas.
provide assistance in the expansion and balanced growth of international trade,
and in line with achieving the objectives of economic policies, supporting and
sustaining the high level of employment, real income, and utilization of available
resources from member countries.
Encourage a healthy and orderly exchange system by supporting stable exchange,
maintain an organized exchange array, and avoiding destructive exchange
downgrading.
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International
monetary fund
￮
The goal of IMF is to (continued):
￮ Create a mutual or multilateral system of payments in terms of current transactions
￮
￮
￮
between members and eradicate restrictions in foreign exchange to allow for faster
world trade.
Ensure temporary financial resources are available for members, so that they will
have the option of adjusting any fallacies in their balance of payments.
Abbreviate the interval and lessen the degree of disequilibria in members’
international balance of payments.
3 methods of obtaining the achievement of objective:
￮ Advice and surveillance
￮ Financing
￮ Technical assistance
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The World Bank
Mission:
￮
To fight poverty and improve the living standards of people in the developing
countries.
￮
This is accomplished by providing loans, policy advice, technical assistance,
and knowledge sharing services to low income countries, and promoting
employment growth.
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2 agencies are used to execute
the roles of World Bank:
International Bank for
Reconstruction and
Development (IBRD)
￮ Focuses on the middle
income and
creditworthy poor
countries
￮
Provides loans that
come with preferential
interest rates for
middle income nations.
International
Development
Association (IDA)
￮ Focuses on the poorest
countries in the world.
￮
Provides grants and
loans to low income
countries, which
usually comes with low
or no interest.
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4.3
The Global Capital
Market
Let’s start with the next set of slides that
covers… next page.
A CAPITAL MARKET is a
market in which individuals
and institutions trade
financial securities.
Organizations/institutions in
the public and private
sectors also often sell
securities on the capital
markets in order to raise
funds.
COMPONENT
The Global
Capital
Market
BENEFITS
GROWTH
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Components of GCM
Capital markets bring together
investors and borrowers:
￮
￮
investors – corporations with surplus
cash, individuals, and non-bank
financial institutions
borrowers – individuals, companies,
and governments
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Components of GCM
￮
markets makers – the financial
service companies that connect
investors and borrowers, either
directly (investment banks) or
indirectly (commercial banks)
Capital market loans can be equity or
debt.
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Components of GCM
Investors
Borrowers
• Companies
• Individuals
• Institutions
• Individuals
• Companies
• Governments
Market Makers
• Commercial banks
• Investment banks
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Benefits of GCM
Attractions of global capital markets:
￮
￮
The borrower’s perspective: a lower
cost of capital
The home bias puzzle
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The growth of GCM
The growth in the markets is a result of:
￮
Advances in information technology
￮
Deregulation by governments
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Thanks!
Any questions?
You can find me at
￮
￮
￮
￮
My Edmodo
Sharing wall at my Padlet
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My email: mfauzan.abas@mara.gov.my
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