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Managing in the Global Economy Foreign Exchange Risk Management

Mohammad Arief. Managing in the Global Economy Foreign Exchange Risk Management. INTRODUCTION. The reduction of trade barriers. GLOBAL ECONOMY. Increased the competitive pressure. The opening of markets to foreign imports. E NTRY TO THE FOREIGN COUNTRIES.

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Managing in the Global Economy Foreign Exchange Risk Management

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  1. Mohammad Arief Managing in the Global EconomyForeign Exchange Risk Management

  2. INTRODUCTION The reduction of trade barriers GLOBAL ECONOMY Increased the competitive pressure The opening of markets to foreignimports ENTRY TO THE FOREIGN COUNTRIES

  3. Carlos Slim (Mexico) - 53.5 milyar dolar AS, telekomunikasi Bill Gates (USA) - 53 milyar dolar AS, Microsoft Warren Buffett (USA) - 47 milyar dolar AS, Berkshire Hathaway Mukesh Ambani (India) - 29 milyar dolar AS, Petro kimia, minyak dan gas. Lakshmi Mittal (India) - 28.7 milyar dolar AS, Baja. Larry Ellison (USA) - 28 billion, Oracle Bernard Arnault (France) - 27.5 milyar dolar AS, LVMH Eike Batista (Brazil) - 27 milyar dolar AS, penambangan, minyak. Amancio Ortega (Spain) - 25 milyar dolar AS, pengusaha. Karl Albrecht (Germany) - 23.5 milyar dolar AS, supermarkets FORBES

  4. Richest Company (Fortune) • Royal Dutch Shell- (Total revenue USD 247,613 miliar, Profit 27,909 miliar) • Wal-Mart Stores - (Total revenue USD 469,162miliar, Profit 16,999 miliar) • Exxon Mobil - (Total revenue USD 449,886miliar, Profit 44,880miliar) • Sinopec Group- (Total revenue USD 428,167miliar, Profit 8,221miliar) • China National Petroleum- (Total revenue USD 408,630miliar, Profit 18,196 miliar) • BP- (Total revenue USD 388,285miliar, Profit 11,582miliar) • State Grid - (Total revenue USD 298,449miliar, Profit 12,318miliar) • Toyota Motor- (Total revenue USD 265,702 miliar , Profit 11,587 miliar) • Volkswagen- (Total revenue USD 247,613 miliar, Profit 27,909 miliar) • Total- (Total revenue USD 234,278 miliar, Profit 13,743 miliar)

  5. Factors influences Market Driven Cost Driven Why The Firm Entry To The Foreign Countreis Supported with Competitive Driven Government Driven Regional Trading Agreements

  6. Regional Trading Agreements • The European Union (EU) • A unified economic and trade entity • Belgium, Denmark, France, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, the United Kingdom, Germany, Austria, Finland, and Sweden • Economic and monetary union (Euro) • North American Free Trade Agreement (NAFTA) • Eliminated barriers to free trade (tariffs, import licensing requirements, and customs user fees) • United States, Canada, and Mexico

  7. European Union Countries

  8. Regional Trading Agreements (cont’d) • U.S.-Central America Free Trade Agreement (CAFTA) • Free Trade Area of the Americas • Southern Cone Common Market (Mercosur) • Association of Southeast Asian Nations (ASEAN) • Trading alliance of 10 Southeast Asian nations • African Union • South Asian Association for Regional Cooperation (SARRC)

  9. ASEAN Members

  10. How Organizations Go Global

  11. Import/export sales and profit margins are verysensitive to changes in exchange rates IMPORT-EXPORT SALES AND EXCHANGERATES Risk Occurs when a purchase agreement or sales contract(a specific “transaction”) commits the company to make future payables or accept futurereceivables in a foreign currency. 1 Transaction risk exposure Occurs when a company’s foreign assets (or liabilities)are affected by persistent exchange rate trends. 2 Translation risk exposure Operating risk exposures are more difficult to hedge thantransaction risk exposures and more difficult to forecast than translation risk exposures 3 Operating risk exposure

  12. Outsourcing to foreign contract manufacturers is, however, as much about importingcompetitiveness as it is about exporting jobs OUTSOURCING • Technology • Lesscomplex assembly • Rawmaterials handling tasks to places Determine Time-to-market and the capacity to innovatequickly

  13. Determinants of Foreign Exchange rates in countries (Short Run): Import/Export Flows and Transaction Demand for a Currency The Equilibrium Price Speculative Demand, Government Transfers, and Coordinated Intervention Short-Term Exchange Rate Fluctuations THE MARKET FOR FOREIGN EXCHANGE

  14. The Role of Real Growth Rates • The Role of Real Interest Rates The higher the real rate of interest in an economy, the greaterthe demand for the financial assets offered by that economy • The Role of Expected Inflation Inflationary expectations provide an important third determinant of long-term trends in exchange rates. DETERMINANTS OF LONG-RUN TRENDS IN EXCHANGE RATES

  15. Shares of World Trade and Regional Trading Blocs Comparative Advantage and Free Trade Import Controls and Protective Tariffs Strategic Trade Policy Increasing Returns Network Externalities INTERNATIONAL TRADE: A MANAGERIALPERSPECTIVE

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