Peng Inst Chapter 7 REVISED (2nd Edition)

Peng Inst Chapter 7 REVISED (2nd Edition) - Peng...

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Peng Global Business 2e Chapter 7 Dealing with Foreign Exchange 1
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LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. List the factors that determine foreign exchange rates. 2. Articulate the steps in the evolution of the international  monetary system. 3. Identify strategic responses firms can take to deal with foreign exchange movements. 4. Participate in two leading debates on foreign exchange  movements. 5. Draw implications for action. 2
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Two Core Perspectives The institution-based view suggests that  rules of the game, domestic and  international institutions (such as the IMF)  influence foreign exchange rates. The resource-based view shows how Wal- Mart (Closing Case) and its suppliers can  profit from favorable exchange rate  movements. 3
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FACTORS BEHIND FOREIGN EXCHANGE RATES  (What determines  exchange rates?) Foreign exchange rate  -  price of one currency in  terms of another (see Table 7.2). Is the US dollar stronger or weaker than the euro?  (Table 7.2) What does the difference between the currencies  suggest about the demand of each? How will the exchange rates affect trade and   investment between the US and EU? 4
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Basic Supply and Demand The exchange rate is the price of a commodity  (money). Strong demand for a currency will lead to an  increase in the exchange rate, oversupply will  lead to a decrease in that rate. For example, to the extent that US products are  demanded by foreigners (and must be paid in US  dollars), the exchange rate will rise relative to  other currencies. 6
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Basic Supply and Demand Chinese importers of US products must  pay in dollars (the yuan is nonconvertible)  which are generated by Chinese exports to  the US. Many countries prefer to hold and transact  in US dollars.  About 65% of foreign exchange holdings  are in US dollars, 25% euros, 4% yen, and  3% in pounds. 7
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Basic Supply and Demand What determines the supply and demand of  foreign exchange? Table 7.1 lists five  determinants. 9
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Relative Price Differences and  Purchasing Power Parity Price differences  -   Switzerland is more expensive that  the Philippines.  How do price differences affect exchange  rates?  Answer – PPP.  Purchasing Power Parity (PPP) -   A conversion that  determines the equivalent amount of goods and services  different currencies can purchase.  This conversion is  usually used to capture the differences in cost of living in  different countries. PPP theory 
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This note was uploaded on 03/16/2011 for the course MGMT 418 taught by Professor Byles during the Spring '11 term at VCU.

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Peng Inst Chapter 7 REVISED (2nd Edition) - Peng...

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