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International Business. Chapter 7 Currency and Risk Management. Currency and Currency Exchange . Currency Management Money and Currencies Money – Anything that people accept as payment Acceptability To be used as money it must be accepted by a large group Scarcity

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international business

International Business

Chapter 7

Currency and Risk Management

currency and currency exchange
Currency and Currency Exchange
  • Currency Management
  • Money and Currencies
    • Money – Anything that people accept as payment
    • Acceptability
      • To be used as money it must be accepted by a large group
    • Scarcity
      • Short supply of a product/item, causing it to be more valuable
    • Durability
      • Not easy to damage
    • Divisibility
      • It is easily divided into smaller units
    • Portability
      • Easy and small enough to carry around
currency and currency exchange1
Currency and Currency Exchange
  • Uses of Money
    • Measure of Value
      • Tells us what something is worth
    • Medium of Exchange
      • Only works if people are willing to trade goods for it
    • Savings Mechanism
      • Crucial use of money is the ability to store it as savings
  • Barter
    • An exchange of goods/services without the use of money
    • It does express value and is a medium of exchange, it is difficult to save for the future
  • Currency
    • The form of money used by a specific country or region
currency and currency exchange2
Currency and Currency Exchange
  • Currency Exchange
      • Currency Exchange rate: The rate at which one country’s currency can be traded for another country’s currency.
      • Hard Currency (Convertible Currency)
        • Currency that can be exchanged for other currencies at uniform rates in financial centers around the world
      • Soft Currency
        • An unstable currency that is not exchanged at major financial centers
        • Has limited use outside ones country
  • Exchange Rates and International Business
      • When Currency Changes Value
        • Must make changes to compensate for loss
currency and currency exchange3
Currency and Currency Exchange
  • Factors Affecting Exchange Rates
    • Balance of Payments
      • The difference in the amount of money a country pays another country and the amount it receives from them
    • Economic Conditions
      • Interest Rates
      • Inflation Rates
      • Economic Growth and Decline
      • GNP vs. GDP
    • Political Conditions
      • Possibility of war or overthrow of a government will decrease that countries currency value
currency and currency exchange4
Currency and Currency Exchange
  • Exchange Rate Problems
    • Lower profits
    • More difficult to sell items, because of price changes
    • Discourage Trade
  • Managing Exchange Rates
      • Market Measures (strategies)
        • Devaluing its currency – helps local vendors protect sales and profits
      • Nonmarket Measures
        • Tariffs and Quotas
        • Exchange Controls – limits amount of currency leaving the country
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Currency and Currency Exchange
  • International Financial Organizations
    • International Monetary Fund
      • Monitors purchases and sales of goods to observe the balance of trade
      • Suggests economic policies that might help improve trade
      • Makes loans – low interest to protect countries from becoming overburdened by debt and interest
    • World Bank
      • Provide loans and helping improve communication and transportation systems and energy plants in disadvantaged countries
    • European Economic and Monetary Union
      • Guides the economies of the EU
    • Other Exchange Organizations
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Currency and Currency Exchange
  • Financing an International Business
    • Intercompany Financing
      • Borrow or receive money from an existing parent company
      • Loans from other corporations
    • Equity Financing
      • Method a company uses to raise capital by selling shares of stock
    • Debt Financing- 3 Sources
      • International bank Loans
      • Euronote markets
      • International Bond Markets
    • Local Currency Financing
      • Get loans from local banks
risk management
Risk Management
  • Risk Management
    • Risk vs. Return
      • The higher the risk the higher the possible return
      • Risk – The possibility of loss when there is uncertainty associated with the outcome of an event
    • Commercial Risk
      • Risk present in day-to-day buying and selling process between
    • 3 Types of Commercial Risk
      • Exchange Rate Risk
        • Occurs when the currency exchange rate fluctuates as a transaction takes place
        • Reducing Exchange Rate Risk
          • Spot trade- rate between 2 currencies for an immediate trade
          • Forward rate- fixed for a certain period of time
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Risk Management
  • Transaction Risk
    • Risk associated with a buyer making installment payments on a purchase
    • Reducing Transaction Risk
      • Cash in Advance, Letter of Credit, Bill of exchange, Sale on Account, Promissory note, Electronic Funds Transfer
    • Commercial Invoice
      • Written statement of what is sold and terms of the sale
  • Insurable Risk
    • Risk that insurance companies will cover, including an “Act of God” and other less random events
  • Managing Money and Risk
    • Success in international business means carefully managing every aspect of currency exchanged