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Chapter 7
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.2
International financial
markets and institutions
Objectives
Introduction
Foreign exchange markets
Determination of the exchange rate
Protecting against exchange risk
Foreign money and capital markets
Regional money and capital markets
The IMF system.
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.3
Objectives
Review the basic characteristics of all the
financial markets that may be available to a firm
in international business.
Examine the foreign exchange market, its
operation and the main participants.
Explain the fundamental economic factors that
determine exchange rates.
Show how firms can operate successfully in
more than one currency without facing
unacceptable levels of exchange risk.
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.4
Objectives (Continued)
Give insights into domestic money and capital
markets that exist around the world.
Describe the functioning of the euromarkets, both
short term and long term.
Explain how the international monetary system
functions and how it relates to both private-sector
firms and governments.
Look at a countrys balance of payments and
show what lessons can be drawn from it.
Show how firms can take advantage of the
opportunities available in all of these markets.
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.5
Introduction
International financial markets are relevant to
companies, whether or not they become directly
involved in international business through exports,
direct investment and the like.
Purchases of imported products or services,
borrowing and investment in other countries or
currency, all involve exchange risk.
Exchange risk: The risk of financial loss or gain
due to an unexpected change in a currencys
value.
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.6
Introduction (Continued)
Foreign exchange: any financial instrument that
carries out payment from one currency to
another.
Exchange rate: the amount of one currency that
can be obtained for another currency.
Spot rate is the rate quoted for current foreign
currency transactions.
Forward rate is the rate quoted for the delivery of
foreign currency at a predetermined future date
such as 90 days from now.
Cross rate is an exchange rate that is computed
from two other rates.
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.7
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.8
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.9
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.10
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.11
Figure 7.2
Source: Adapted from Robert Grosse, St. Louis Fed Review, March 1984, p. 91
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.12
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.13
Slide 7.14
Figure 7.1
Slide 7.15
Economic relationship
for exchange rate determination
Exchange rates are determined by the activities
of the groups discussed above, as well as
through two fundamental economic relationships
that underlie exchange rate determination:
Purchasing power parity
The international Fisher effect.
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.16
Infl = Inflation
XR = Exchange Rate
t = time
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.17
i = interest rate
XR = exchange rate
t = time
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.18
Combined equilibrium
The future exchange rate, XRt+1, will be partially
determined by both of the above factors (PPP
and IFE) in the absence of government
intervention.
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.19
Figure 7.3
Slide 7.20
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
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Slide 7.22
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.23
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.24
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.25
Slide 7.26
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.27
Rugman and Collinson, International Business, 6th Edition, Pearson Education Limited 2013
Slide 7.28