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Businesses that sell products to businesses
in other countries must consider the value of
money in other countries.
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Buying from and selling to international
partners requires knowing how to manage
money. This includes understanding the
impact of exchange rates on trading
relationships.
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Currency Management
Investors know that greater risk is
associated with greater return.
Greater risk increases the chance that you
will lose money.
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Money and Currencies
A market is any place
where money is
exchanged for things of
value.
money
anything that people
accept as a form of
payment
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Money and Currencies
The Five Characteristics of Money
Acceptability
The item must be accepted by a group of people.
Scarcity
If there is a short supply of a product, it becomes more valuable.
Durability
The item will not easily spoil or become damaged.
Divisibility
The item can be divided into smaller units.
Portability
The item must be small enough that people can carry it easily.
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Selling for Seashells In Asia and Africa,
cowrie shells were used as money for
centuries. These tiny seashells from the
Indian Ocean became symbols of
currency. Today the currency of Ghana in
Africa is called “cedi,” a form of the
Ghanaian word meaning “cowrie shell.”
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Uses of Money
The Three Main Purposes of Money
Measure of
Value
As a measure of value, money tells you what something is worth.
Everyone assigns a relative value to goods and services.
Medium of
Exchange
As a medium of exchange, money works only if people
trade goods and services for it.
Savings
Mechanism
Some people save gold, because they believe it will hold value
in the future. Confidence in a form of money is an important
part of financial stability.
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Barter
Barter is an exchange of goods or services
without the use of money.
Barter expresses value and is a medium of
exchange.
Barter is difficult to tax.
Barter usually takes place domestically.
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Currency
Know the currency in
the country where you
intend to trade.
currency
the form of money
used by a specific
country or region
The symbol “$”
represents the currencies
of many countries.
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Currency
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Currency Exchange
If the currency
exchange rate is
US$1.00 to € .82, then it
takes one U.S. dollar to
buy .82 euro.
currency exchange
rate
the rate at which one
country’s currency can
be traded for another
country’s currency
The ratio is 1 to .82
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Hard Currency
Another name for hard
currency is convertible
currency.
Both the U.S. dollar and
the euro are examples
of hard currency.
hard currency
a currency that can be
exchanged for other
currencies at uniform
rates in financial
centers around the
world
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Soft Currency
A soft currency may
only be used to buy and
sell goods within a
country.
soft currency
an unstable currency
that is not exchanged
at major financial
centers
Soft currencies are found
in underdeveloped and
developing nations.
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Exchange Rates and International
Business
Money establishes the
relative value of goods
and services.
When the value of one
currency changes, its
price in international
markets fluctuates.
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When Currency Changes Value
A U.S. company makes and sells sandals.
A company in Spain sells the sandals for nine euros (€9),
which is about ten U.S. dollars ($10).
The exchange rate suddenly changes, and the euro loses value compared
to the U.S. dollar. The euro is now only worth nine dollars.
The retailer in Spain is now losing one dollar per pair of sandals.
The retailer can raise the price of the
sandals to compensate for the loss.
The retailer can keep the price as it is
and lose money each sale.
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Factors Affecting Exchange Rate
Several factors affect
exchange rates and
cause currency value
fluctuation.
Balance of Payments
Economic Conditions
currency value
fluctuation
the change in value of
one country’s currency
when it is traded for
another country’s
currency
Political Conditions
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Balance of Payments
A country with an unfavorable balance of
payments is importing more products than
it is exporting.
An unfavorable balance of payments can
occur when residents leave with money
and spend it in other countries.
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Balance of Payments
Characteristics of a Country with
Unfavorable Balance of Payments
Negative impact on unemployment
Negative impact on interest rates
Negative impact on the value of currency
Less currency is available
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Economic Conditions
Four Indicators of Economic Conditions
Interest Rates
Higher interest rates slow down purchases and investments.
Inflation Rates
Inflation is a rise in price of goods and services. This means
you must pay more money to buy the same amount of
goods and services you bought last year.
Economic Growth
and Decline
(GDP Levels)
When the GDP rises, a country’s economy is strong.
Unemployment
Rates
A high unemployment rate is one sign that a nation’s
economy is weak.
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Economic Conditions
Gross Domestic Product (GDP) is the total
value of all goods and services sold in a
country.
Gross National Product (GNP) is more
specific than GDP and is based on the
value of GDP.
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Political Conditions
The possibility of war or the overthrow of a
government will cause a country’s currency
to lose value.
Expropriation is a major political risk
involved in doing business in an unstable
country.
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When in Luxembourg
Meeting and Greeting Shake hands with everyone
present and again when you leave.
Business Etiquette Meetings start on time; call with an
explanation if you are late. Meetings are usually brief.
Business Dress Men wear suits and ties, or a sports
coat and dress pants. Women wear dresses or suits.
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Exchange Rate Problems
Exchange Rate Problems
Rising inflation levels
Rising interest rates
Lower profits
Difficulty selling items because of price changes
Difficulty trading
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Managing Exchange Rates
Two approaches for managing exchange
rates are:
Market measures
Nonmarket measures
The goal of these measures
is to create a “level playing field.”
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Market Measures
Devaluation of a currency helps local
vendors protect sales and profits.
Devaluation can be used as a tool to
encourage deflation instead of inflation.
Devaluation may result in reduced
importation of goods and other currencies.
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Nonmarket Measures
Nonmarket measures include:
Tariffs
Quotas
Exchange controls
Limits on travel
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International Financial
Organizations
The international monetary system is a
network of international organizations that try
to help individual countries create and
participate in trade.
International
Monetary Fund (IMF)
World
Bank
European Economic and
Monetary Union
Other Exchange
Organizations
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International Monetary Fund (IMF)
The IMF tries to help countries by doing three
things:
1. Monitors purchases and sales of goods to
observe the balance of trade
2. Suggests economic policies that might help
improve trade
3. Makes loans
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World Bank
The activities of the World Bank include:
Providing loans
Helping to build and improve
communication and transportation systems
Helping to build and improve energy plants
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World Bank
The goal of the World Bank is to help
countries develop international trade through
its organization, the International
Development Association (IDA).
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European Economic and Monetary
Union
The European Economic and Monetary Union
(EMU) is the financial agreement that guides
the economies of the European Union (EU).
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Other Exchange Organizations
Other exchange organizations include:
Asian Development Bank (AsDB)
European Bank for Reconstruction and
Development (ERDB)
Inter-American Development Bank (IDB)
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Financing an International Business
Many financial
institutions help
businesses in
underdeveloped
countries obtain
start-up capital.
capital
money needed to
establish a business
and operate it for the
first few months, or to
expand an existing
business
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Financing an International Business
Ways to
Obtain Capital
Intercompany Financing
Equity Financing
Debt Financing
Local Currency Trading
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Intercompany Financing
The two ways to obtain intercompany
financing are:
Borrow or receive capital from an existing
parent company.
Obtain loans from other corporations.
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Equity Financing
Equity financing is the method a company
uses to raise capital by selling shares of a
stock.
Owning one share of stock gives you one
vote to elect the company’s board of
directors.
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Debt Financing
Debt financing occurs when a company takes
out long-term loans to obtain capital.
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Debt Financing
Three sources of debt financing for
international operations are:
International bank loans
Euronote markets
International bond markets
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Local Currency Financing
Local banks can sometimes be the best
place to find capital.
Banks may allow a new business to write a
check, or overdraft, as a form of loan.
Non-bank loans may come from private
companies.
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