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Introduction to International Business

Introduction to International Business. David J. Boggs, Ph.D. Currencies and Financial Markets. International Financial Markets Review of Terms. Debt Equity Bond Stock International Capital Market. Some questions:. What is a foreign currency? Have you ever exchanged money?

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Introduction to International Business

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  1. Introduction to International Business David J. Boggs, Ph.D. Currencies and Financial Markets

  2. International Financial Markets Review of Terms • Debt • Equity • Bond • Stock • International Capital Market

  3. Some questions: • What is a foreign currency? • Have you ever exchanged money? • How much is traded daily? • Who buys and sells currencies?

  4. Who buys and sells? • Multinational companies • Banks, brokers, and financial institutions • Individuals • Speculators, investors, hedge funds • Governments

  5. Foreign Exchange • Why do companies exchange money?

  6. Foreign Exchange • Why do companies exchange money? • Buy products, parts, supplies • Invest abroad • Have been paid in foreign currency • Protect against risk (hedging) • Try to make a profit (speculating)

  7. London New York Tokyo Singapore Dollar Euro Yen British Pound Top Markets and Currencies

  8. Direct (American terms) and Indirect (European terms) • The U.K. pound and Canadian dollar tend to be quoted in direct terms (dollars per currency) • Other currencies tend to be quoted in indirect terms (currency per dollars) • Most publications indicate both direct and indirect rates

  9. Currencies Rate Regimes • Pegged or fixed • Floating • “Dirty” float • Managed

  10. Eurocurrency Vehicle Intervention Safe Haven Hard and Soft Convertible and Non-Convertible Strong and Weak Spot Forward discount premium Cross rates Currencies and Rates

  11. Buying and Selling Currencies • Bid price (what a trader offers) • Ask price (what a trader charges) • Spread (the difference in the two; the trader’s profit) • Example: • Bid – pay 10 pesos for a dollar • Ask – sell dollars for 10.5 pesos • Spread – .5 peso profit

  12. MNC Currency Considerations • Political and Economic Risk • Exchange Controls and Convertibility • Inflation • hyperinflation • Interest Rates • nominal • real (nominal minus inflation)

  13. Hedging (versus Speculation) • Derivatives • Forward contracts (banks and financial institutions) • Futures market • International Monetary Market (Chicago Mercantile Exchange) • Fixed quantities and delivery dates • Currency options (Philadelphia Stock Exchange) • Credit Hedge • Exposure Netting • Open position in two balancing currencies • Avoids cost of hedging

  14. Arbitrage • 1 dollar = 100 yen • 100 yen = 10 pesos • 9.8 pesos = 1 dollar • Simultaneously trade 1 dollar for 100 yen, 100 yen for 10 pesos, 9.8 pesos for 1 dollar and you are left with .2 pesos profit

  15. Assignment • For next class bring a plot to class of the movement of a currency relative to the U.S. dollar for the past four years. To create the plot, go to the following url: • http://fx.sauder.ubc.ca/ or oanda.com or finance.yahoo.com • Choose a currency likely to strengthen this semester and one likely to weaken.

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