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International Business

International Business. Chapter 7 Currency and Risk Management. Currency and Currency Exchange . Currency Management Money and Currencies Money – Anything that people accept as payment Acceptability To be used as money it must be accepted by a large group Scarcity

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International Business

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  1. International Business Chapter 7 Currency and Risk Management

  2. Currency and Currency Exchange • Currency Management • Money and Currencies • Money – Anything that people accept as payment • Acceptability • To be used as money it must be accepted by a large group • Scarcity • Short supply of a product/item, causing it to be more valuable • Durability • Not easy to damage • Divisibility • It is easily divided into smaller units • Portability • Easy and small enough to carry around

  3. Currency and Currency Exchange • Uses of Money • Measure of Value • Tells us what something is worth • Medium of Exchange • Only works if people are willing to trade goods for it • Savings Mechanism • Crucial use of money is the ability to store it as savings • Barter • An exchange of goods/services without the use of money • It does express value and is a medium of exchange, it is difficult to save for the future • Currency • The form of money used by a specific country or region

  4. Currency and Currency Exchange • Currency Exchange • Currency Exchange rate: The rate at which one country’s currency can be traded for another country’s currency. • Hard Currency (Convertible Currency) • Currency that can be exchanged for other currencies at uniform rates in financial centers around the world • Soft Currency • An unstable currency that is not exchanged at major financial centers • Has limited use outside ones country • Exchange Rates and International Business • When Currency Changes Value • Must make changes to compensate for loss

  5. Currency and Currency Exchange • Factors Affecting Exchange Rates • Balance of Payments • The difference in the amount of money a country pays another country and the amount it receives from them • Economic Conditions • Interest Rates • Inflation Rates • Economic Growth and Decline • GNP vs. GDP • Political Conditions • Possibility of war or overthrow of a government will decrease that countries currency value

  6. Currency and Currency Exchange • Exchange Rate Problems • Lower profits • More difficult to sell items, because of price changes • Discourage Trade • Managing Exchange Rates • Market Measures (strategies) • Devaluing its currency – helps local vendors protect sales and profits • Nonmarket Measures • Tariffs and Quotas • Exchange Controls – limits amount of currency leaving the country

  7. Currency and Currency Exchange • International Financial Organizations • International Monetary Fund • Monitors purchases and sales of goods to observe the balance of trade • Suggests economic policies that might help improve trade • Makes loans – low interest to protect countries from becoming overburdened by debt and interest • World Bank • Provide loans and helping improve communication and transportation systems and energy plants in disadvantaged countries • European Economic and Monetary Union • Guides the economies of the EU • Other Exchange Organizations

  8. Currency and Currency Exchange • Financing an International Business • Intercompany Financing • Borrow or receive money from an existing parent company • Loans from other corporations • Equity Financing • Method a company uses to raise capital by selling shares of stock • Debt Financing- 3 Sources • International bank Loans • Euronote markets • International Bond Markets • Local Currency Financing • Get loans from local banks

  9. Risk Management • Risk Management • Risk vs. Return • The higher the risk the higher the possible return • Risk – The possibility of loss when there is uncertainty associated with the outcome of an event • Commercial Risk • Risk present in day-to-day buying and selling process between • 3 Types of Commercial Risk • Exchange Rate Risk • Occurs when the currency exchange rate fluctuates as a transaction takes place • Reducing Exchange Rate Risk • Spot trade- rate between 2 currencies for an immediate trade • Forward rate- fixed for a certain period of time

  10. Risk Management • Transaction Risk • Risk associated with a buyer making installment payments on a purchase • Reducing Transaction Risk • Cash in Advance, Letter of Credit, Bill of exchange, Sale on Account, Promissory note, Electronic Funds Transfer • Commercial Invoice • Written statement of what is sold and terms of the sale • Insurable Risk • Risk that insurance companies will cover, including an “Act of God” and other less random events • Managing Money and Risk • Success in international business means carefully managing every aspect of currency exchanged

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