Slide 1.

Chapter 1

Introduction

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Slide 1.2

PART 1 THE RISE OF THE MULTINATIONAL CORPORATION

I. The MNC: A Definition

a company with production and
distribution facilities in more than one
country.
with a parent company located in the home
country
at least five or six foreign subsidiaries

2 Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.3

Why Go Global?

Raw materials (oil majors, miners)

New markets (global brands)
Minimize production costs (techs)
Diversification (???)
Tax
Politics and regulation (joint
ventures, subsidiaries)
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Pearson Education Limited 2014
 Slide 1.4

Exchange Rate Definitions

(Bilateral) (spot) exchange rate, S, is (domestic currency)
price of unit of foreign currency (FX), so rise (fall) in S is
fall (rise) in value of domestic currency
Cross exchange rate is bilateral exchange rate between
two currencies other than US dollar, $
Cross exchange rate = ratio of two bilateral exchange
rates against the $, since deviations create profit
opportunities for traders.
Assume (unless stated otherwise) free capital movements
i.e. currency fully convertible

Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.5

Demand for Currency/FX

UK residents demand $ in exchange for in order
to import from or invest in USA
US residents demand in exchange for $ in order
to import from or invest in UK
Speculators buy or sell (sell or buy $)
whichever looks more profitable at the time
Total excess demand/supply eliminated
instantaneously by exchange rate movement

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 Slide 1.6
1.1.3 Buying vs. selling rates

Figure 1.1 Supply and demand in the market for foreign currency

Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.7

Floating versus Fixed Exchange rate

Pure float: exchange rate at any moment determined by
net demand for currency
Fixed exchange rate: monetary authority intervenes by a)
buying up excess supply of $ with (when strong, $
weak) or b) satisfying excess demand for $ by selling $
for (when weak, $ strong), so as to prevent excess
demand /supply affecting rate
a) adds $ to FX reserves, adds to in circulation
b) takes $ out of FX reserves, reduces in circulation

Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.8
1.2.1 Floating rates

Figure 1.2 Shifts in the excess demand for foreign currency

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 Slide 1.9
1.3 Balance of payments
1. Current account: export receipts as credits, import payments
as debits, net = current account balance (goods, services
including financial services, interest and dividends, rent,
tourism)
2. Capital account: net capital inflows = net purchases of by
foreigners in order to acquire claims on UK residents less net
sales of by UK residents in order to acquire claims on
foreigners (Long term including securities equities, bonds
etc - real estate etc + short term including bank deposits,
short term securities)
Total net underlying demand for = 1 + 2 (basic balance) is
equated to zero by exchange rate movement, unless
Government intervenes to fix exchange rate, in which case:
3. Reserve change = - (1 + 2) to prevent basic balance causing
exchange rate to move

Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.10
Table 1.3 UK BALANCE OF PAYMENTS 2014

Credits Debits Net

000m

Goods and services 515.2 549.7 -34.5

Goods 295.4 419.1 -123.7

Services 219.8 130.6 89.1

Current income 144.5 177.6 -33.1

Employees' Income 1.1 1.5

Investment income 143.4 176.1

Transfers 19.2 44.4 -25.2

Government transfers 5.0 25.9

Nongovernmental Transfers 14.1 18.5

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Current account Total 678.8 771.7 -92.9
Slide 1.11
Exchange rates since 1945
Bretton Woods 1944-68 US $ fixed at 1 oz gold = $35, all other
currencies fixed to $ with 1% fluctuation bands, devaluations
to correct persistent deficits
Breakdown 1968-73 as US printed excess $ causing worldwide
inflation and flight into gold, other currencies (DM, Yen)
Floating Era 1973 onward managed floats for most convertible
currencies at first, but later experiments with limited fixed
systems e.g. ERM in Europe, currency boards in Hong Kong,
Argentina,
EMU 1998 onward response to failure of fixed exchange rates
Increasing importance of Asian exchange rates 2000 onward
especially RMB, Won, Rupee (varying degrees of
flexibility/convertibility, increasingly linked to $//Yen currency
basket)
Copeland, Exchange Rates and International Finance, 6th edition
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Slide 1.12

CURRENT CRISES
Eurozone: ClubMed v North Europe
BREXIT
Future of world trade post-Trump
Failing emerging markets: Brazil, Argentina, Africa
(incl SA), Russia
Japan: permanent crisis/stagnation ?
Another global banking crisis (GFC) ?

Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.13

Figure 1.3 Exchange rates against the US dollar, 1975-2007 (1999=100)

UK pound German Deutschmark ( Euro from 1999 onwards )
French franc (till 1998) Japanese yen
Swiss franc

160

140

120

100

80
Stronger against $
60

40

20

Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.14

Figure 1.4 Effective exchange rates ( trade weighted ), 1975 - 2006

Japanese yen Swiss franc
German Deutschmark (Euro from 1999 onward ) US Dollar
UK pound French franc (till 1998)

180
160
140
120
100
80
60
40
20
0

Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.15

Figure 1.5 The pound (trade weighted and bilateral), 1975 - 2006
UK pound - trade weighted UK pound against US dollar - bilateral

160

140

120

100

80

60

40

20

Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.16

Fig 1.6 THE EURO SINCE 1999

Currencies per
1.7

1.6
$US Yen Pound Swiss Franc

1.5 $HK $ Singapore

Stronger ------>
1.4

1.3

1.2

1.1

0.9

0.8

Copeland, Exchange Rates and International Finance, 6th edition

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Slide 1.17

160 Currencies in the Crisis and After

CAD
YEN
January 2nd 2007 = 100
EURO
POUND
SWISS FRANC HK DOLLAR
140
NZ DOLLAR WON
MEX PESO AUD

120

<----- stronger agianst $

100

80

60

Copeland, Exchange Rates and International Finance, 6th edition

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 Slide 1.18 CROSS RATES
Financial Times 30/04/17

Currencies GBP EUR USD $ JPY

United Kingdom
N/A 1.188 1.2948 144.41
1 GBP

United States
0.772 0.9175 N/A 111.53
1 USD

European Union
0.8411 N/A 1.0895 121.51
1 EUR

Australia
0.5778 0.6867 0.7484 83.47
1 AUD

Canada
0.5652 0.6717 0.7321 81.65
1 CAD

China
0.1119 0.133 0.145 16.1708
1 CNY

Japan
0.0069 0.0082 0.009 N/A
1 JPY

Switzerland
0.7756 0.9218 1.0046 112.05
1 CHF

Copeland, Exchange Rates and International Finance, 6th edition

Pearson Education Limited 2014