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Prachanda Man Shrestha
value of each currency need to be systematized Efficient International Monetary system is integral part of efficient international business system During early 19th century to post 1st World War.Global Monetary System International Business is cross border transaction which involves receipts/payments As each country do have their own national currency. which began operation 1947 . known as great age of internationalism.each country defining its currency into gold value and agreeing to convert into gold on demand Great Depression of 1929-33 led to discard gold standard and attempted establishing stabilization fund and agreements but World War II made it inoperative Bretton Woods Conference initiated IMF to achieve exchange rate stability and to rescue short term BOP Deficit. trade operated under fixed exchange system as Gold Standard.
made US unable to exchange dollar for gold in fixed rate US moved from BOP surplus of $4b in 1947 to $29b deficit in 1971 depleting gold stock from $25b in 1949 to $10b in 1971 IMF’s par value system ended on Aug . 1971 when President Nixon withdrew US commitment Jamaica Agreement in 1976 established floating Exchange rate and ECM established EMS in 1979 with fixed but adjustable rate expressing against European Currency Unit which later led to Euro Many countries following today floating and pegging with some currency Caribbean island to US Dollar. Nepal Bhutan with INR. Brunei to Singapore Cont. International Monetary System during 1947 to 1971 remained as Par Value or pegged exchange rate defining value of currency in terms of gold or US Dollar and maintain market value within 1% up/down By the end of War US held 74% of the World Gold Stock which led countries accumulate dollar. African countries to South African Rand. .
Brokers. Dealers Three important functions Foreign Exchange Market: Transfer of purchasing power from one country to another and from one currency to another as clearing Credit provision for exporters and importers Hedging facilities to cover export risks guarding against losses from fluctuation of exchange rates Use of FExchange Market in International Business: Currency Conversion Investment of Spare cash for short term in money market Currency Speculation about future currency movements .Foreign Exchange Market Market is developed dealing currency to support for International business within the policy frame of national authority and global System Market dealing methods/means by which rights to wealth in one country’s currency converted into rights to wealth in another country’s currency Market where national currencies are bought and sold against one another Foreign exchange Market is global network of Banks.
Tokyo. Singapore Integration with various trading and financial centers Dominant role of US Dollar due to its volume of transaction .Cont Transactions in the Market as International Payments: Transfer of Money from a Bank in one country to Bank in another country Cheques and Bank Drafts based on standing of bank than credit worthiness of firm Foreign Bill of Exchange as unconditional order addressed by one person to another requesting to pay on demand within given future date Documentary or reimbursement credit where importer open a credit in favor of exporter at a bank in the exporter’s country Feature of the Market: Continuous operation –World Trading centers London. New York.
90 days. 180 days into the future: Forward Exchange at Par same value of spot rate Forward Exchange at Discount below spot rate Forward Exchange at Premium above spot rate Currency swap as simultaneous purchase and sale of a given amount of foreign exchange for two different value dates mostly transacted between business firm and their bank Options –contract of financial instrument with right to sell or buy a given quantity of assets at a specified price at a specified future date Arbitage –simultaneous buying and selling of foreign currencies to make profit from difference of rate at same time in different market .Foreign Exchange Market as Risk Taker Major function-insurance against currency exchange risk Currency exchange rates determined by demand/supply and informed by financial trading centers daily /more times a day Daily currency transaction are done on such rate which is known as Spot Exchange Rate Forward Exchange rate-way to insure the currency risk in International Business–forward exchange rates are quoted for 30 days.
Foreign Exchange Rate Exchange rate is domestic price of a foreign currency Fixed Exchange Rate is determined by policy decision making authority Flexible Exchange rate is determined by intersection of the market demand and supply The forces determining exchange rate are complex: Price Inflation – identical products sold in different countries must sell in same based on price equalizing mechanism – purchasing power parity –exchange rate change if relative price change Interest rate reflects likely inflation rate – inflation high interest rate is high–interest rate guide movement of capital flow affecting demand of currency to determine exchange rate Market Psychology –expectation of market tradersInvestors’ psychology can be influenced by political and microeconomic factors Asian monetary crisis (SKorean Chaebol .
fall in the value of dollar increased price competitiveness of US manufacturers in world markets Currency system is influenced by combination of government intervention and speculative activity of market players . Risk related to transaction exposure –firm level obligations for purchase or sale at previously agreed prices and borrowing or lending in foreign currency (NAC) Operating exposure–firm related effect on revenue / costs Translation or Accounting exposure – financial statement of foreign operation in local currencies (Subsidiary/ NAC) Economic Exposure – long run effect on future prices.Foreign Exchange Risk Fluctuation in exchange rate may cause loss or profit International Business on profitability of trade. sales and costs due to exchange rate change. Investment and deals is exposed due to exchange rate Categories of Foreign Exchange Risk.
Strategy of Managing Exchange Risk Forward Exchange Rate: As changes in spot rate could be problematic to International Business. two parties may agree to exchange and execute the deal at some specific date in the future at specified exchange rate Spot exchange rate and forward exchange rate may differ depending on the future possibility of change in rates and agreeing to lock the rate in advance Lead Strategy-collect currency receivables early when expected to depreciate / paying currency payables to suppliers before due when expected to appreciate Lag Strategy-delay collection of receivables if expected to appreciate/delay payables if expected to depreciate Distributing firm’s productive assets to various locations 9Japanes Auto Firms to US and Europe after 1985 saved from rise of value of Yen to Dollars Watching inflation rates as it influence exchange rate Forecasting of exchange rate Regular monitoring firm’s exposure positions through good reporting system Avoiding Exchange Risk by procuring domestically / diversifying sources of purchases .
80 getting per car E12000 with loss of E2000 per car Loss in export transaction to German Volkswagen Company was tremendous Volkswagen could have insured against this adverse movement in exchange rate by entering into foreign exchange market buying a forward contract for dollars at exchange rate of E1=$1 which is known as hedging .Case of Volkswagen Volkswagen Jetta Car made in Germany and exported to US at Euro 14000 selling at $ 15000 profit E 1000 – Exchange rate was E1=$1 In 2003 movement of exchange rate between Dollar and Euro with E1=$1 with value of $1=E0.