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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

    Currency and currency exchange5
    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

    Currency and currency exchange6
    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

    Risk management1
    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