David Chapter 08 mod

David Chapter 08 mod - Chapter 8 CURRENCY OF...

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Chapter 8 C URRENCY OF P AYMENT (M ANAGING T RANSACTION R ISKS ) LEARNING OBJECTIVES At the end of this chapter, the student should be able to: 1 Identify the risks that currency exchange rates pose for both the importer and exporter. 2 Identify the system of currency exchange rates. 3 Identify theories of exchange rate determination. 4 Identify means of exchange rate forecasting. 5 Identify means of managing transaction exposure. 6 Identify international banking institutions. PREVIEW This chapter looks at some of the risks exporters take in dealing with currencies of different nations. It also discusses ways currency fluctuations can be predicted and how participants in international trade can protect themselves from currency valuation swings that may be against them. Some of the more technical aspects of the chapter can be omitted if they are too complex for the level at which the course is offered.
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8-2 Chapter 8 Currency of Payment (Managing Transaction Risks) CHAPTER OUTLINE 8-1 Sales Contracts’ Currency of Quote I. Previous chapters have shown that exporters and importers must agree on: a. Terms of trade b. Terms of sale II. Another issue of concern is currency for the transaction. a. Exporter country’s currency? b. Importer country’s currency? c. Third country’s currency? d. Currency fluctuation e. Convertibility of currency 8-1a Exporter’s Currency I. Exchange rate fluctuation risk is nil for exporter. II. Exchange rate risks borne by importer. 8-1b Importer’s Currency I. Exchange rate fluctuation risk is nil for importer. II. Exchange rate risks borne by exporter. 8-1c Third Country’s Currency I. Exporter and importer responsible for fluctuations of their country’s currency against that of third country. II. Artificial currency such as Special Drawing Rights [SDRs] on International Monetary Fund can be used. 8-1d The Special Status of the euro I. Originally an artificial currency. II. Began circulation in 2002 III. Truly an international currency designed to challenge international status of U.S. dollar
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Chapter 8 Currency of Payment (Managing Transaction Risks) 8-3 8-2 The System of Currency Exchange Rates 8-2a Types of Exchange Rates I. The exchange rate of two currencies is the value of one currency expressed in units of the second. a. The first way to value a currency is the Direct Quote , or the value of the foreign currency expressed in units of the domestic currency. b. The second way to value a currency is the Indirect Quote , or the value of the domestic currency expressed in units of foreign currency. c. Direct quote = _____1_____ Indirect quote II. Spot Exchange Rate the Spot Rate , or the exchange rate for a foreign currency for immediate delivery (at foreign exchange kiosks and banks worldwide) III. Forward Exchange Rate—the Forward Rate , or the exchange rate for a foreign currency to be delivered 30, 90, or 180 days from date of quote a. Outright Rate —the rate at which a commercial customer would purchase
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David Chapter 08 mod - Chapter 8 CURRENCY OF...

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