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Financial Environment
CONTEMPORARY DEVELOPMENTS IN BUSINESS AND MANAGEMENT

Topics
History of Money Exchange Rates Purchasing Power Parity Interest Rates Inflation International Financial Institutions.

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History of Money
Unit of account Medium of exchange Store of value Examples? National currencies What about international trade?

History of International Money

Gold standard (1876 1913) WWI and WWII (1913 1944) Bretton Woods (1944) Nixon (1971 1973) Today (1973 - ????).

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Exchange Rates
1. 2. 3. 5. 7. 4. 6.

No separate legal tender Fixed peg (+/- 1%) Pegged with bands (> 1%) Crawling pegs Crawling pegs with bands Managed floating Independent floating.

Purchasing Power Parity

Better salary: 21m vnd (Hanoi) or 1,000 chf (Zurich)? PPP exchange rate
120,000 vnd 2m vnd 300,000 Hanoi 13 chf Zurich 140 chf 70 chf 2,000 chf 9.230 vnd/chf PPP Rate 14,286 vnd/chf 4,286 vnd/chf 5,500 vnd/chf

Monthly costs

1 chicken, uncooked 700 kw electricity Mans dress shirt Rent 65m2 flat

1 fast food hamburger

45,000 vnd

11m vnd

9 chf

5,000 vnd/chf

Law of One Price

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Fisher Effect
Which is better: 2% on $100 or 12% on 2,100,000? Real interest rate vs. nominal interest rate Real = Nominal Inflation.. or Nominal = Real + Inflation Nominal = Real + Inflation Real = zero Nominal = Inflation Fisher Effect: Nominal = Expected Inflation.

International Fisher Effect

What will the $/ exchange rate be in 1 year Assume: $1.8000 = 1 now Assume: UK govt 1 year bonds @ 8%; US @ 4% What will the rate be in 12 months? $1.8000
% %

Note: This data is not real

$1.8000 0.9630 = $1.7333 / 1 in 12 months International Fisher Effect: Differences in nominal interest rates reflect expected in exchange rates between countries.

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Arbitrage Exercise 1
Scenario: UK govt 1 year bonds @ 8%; US @ 4% $1.8000 = 1 now $1.7500 = 1 forward contract 12 months from now A bank will lend you $10m (in $ or ) @ govt bond rates for one year What do you do?

Covered Interest Arbitrage

What risks are there? 2. What assumptions are there? 3. Explain automatic balancing. Increases demand for now and for $ in 12 monthsnarrowing spread.
1.

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Inflation
What is it? What are its effects? Who can control it? How?

International Financial Institutions

World Bank IMF SWIFT ECB / Fed Visa/MasterCard/PayPal.

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Homework
Watch Inside Job (2010)
See me for subtitles (and movie) if you dont have

Apply everything to your company and industry. Prepare to answer questions about your company and industry.