T6 | FOREIGN EXCHANGE AND GLOBAL MARKETS

Why must global companies buy and sell in different currencies?

To avoid losses and fix the price of currency exchange so they can manage profitability with surety.

Money denominated in the currency of another country or a group of countries.

FOREIGN EXCHANGE

The rate at which the market converts one currency into another.

EXCHANGE RATE

What are the two components of a foreign exchange rate?

• Bid (buy)

• Ask (sell/offer) .

• the price at which a bank or financial firm is willing to buy a currency.

BID (BUY)

the price at which a bank or financial firm is willing to sell a currency.

ASK (SELL/OFFER)

The mechanism in which currencies can be bought and sold.

FOREIGNE EXCHANGE MARKET

Enumerate the four main uses of the FX market.

• Currency Conversion

• Currency Arbitrage

• Currency Hedging

• Currency Speculation

Simultaneous and instantaneous purchase and sale of a currency for a profit. Transactions are done electronically

CURRENCT ARBITRAGE

Refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates.

CURRENCY HEDGING

This is used by the company as a way to protect themselves if there is a time lag between when they bill and receive payment from a customer

CURRENCY HEDGING

One of the biggest challenges in foreign exchange market

Risk rates increasing or decreasing in greater amounts or directions than anticipated

It is the practice of buying and selling currency expecting value changes to make a profit.These changes could happen instantly or over a period of time.

CURRENCT SPECULATION

Exchange rates requiring immediate settlement with delivery of the traded currency, usually within two business days.

SPOT RATE

Is the exchange rate transacted at a particular moment by the buyer and seller of a currency

SPOT EXCHANGE RATE

Exchange rate between two currencies, neither of which is the official currency of the country where the quote is provided.

CROSS RATES

What are the “majors” in foreign exchange?

Currency pairs including the US dollar: EUR/USD, USD/JPY, USD/CAD.

The rate at which a buyer and seller agree to transact a currency at a future date.

FORWARD EXCHANGE RATES

What does the forward rate reflect?

The market’s expectation of the future spot rate for a currency.

This is always quoted against the US Dollar in the forward markets.

Foreign Exchange

Simultaneous buy and sell of a currency for two different dates.

CURRENCY SWAP

The right—but not the obligation—to exchange a specific amount of currency on a future date at a specific rate.

CURRENCY OPTION

A contract requiring the exchange of a specific amount of currency at a future date and specific rate.

CURRENCY FUTURE CONTRACT

How do companies use swap, options, and futures

To manage exposure to currency risk.

Why might companies resort to countertrade?

When countries limit currency convertibility or restrict profits repatriation.

This is similar to but not identical to forward contracts

FUTURE CONTRACTS

What influences currency markets

1. Market factors

2. inflation

3. Interest Rates

4. Marker Psychology

5. Government Policy

6. Government Intervention

What is the role of capital markets?

To transfer funds efficiently from entities with excess funds to those with shortages.

What types of bonds exist in the international bond market? These help companies borrow funds to invest and grow their global businesses.

Foreign bonds, Eurobonds, and global bonds.

This is used by large global firms where they invest in early-stage or growing companies, often as strategic investors prioritizing strategic value over pure financial return.

CORPORATE VENTURE CAPITAL

A type of Corporate Venture Capital where firms are more likely to place a higher priority on the strategic value of the investment rather than just a pure financial return on the investment

STRATEGIC INVESTOR

How did ancient civilizations like Egypt and Mesopotamia conduct trade?

Using coins of gold and silver (bullion).

Coins consisting of pure precious metal.

BULLION

How has the monetary system evolved?

From barter → gold and silver coins → current currency-based system.

Uses a system based on the coins of gold and silver

Ancient Egypt and Mesopotamia

A stable means for countries to exchange currencies and facilitate trade.

GOLD STANDARD

A new monetary system based on the US dollar. This system incorporated some of the disciplinary advantages of the gold system while giving countries the flexibility they needed to manage temporary economic setbacks, which had led to the fall of the gold standard

BRETTON WOOD SYSTEM

When did the EU decide to establish the euro?

In 1991, via the Maastricht Treaty.

List benefits of the euro.

1. More choice and stable prices for consumers

2. Greater security and opportunities for businesses

3. Improved economic stability and growth

4. More integrated financial markets

5. Stronger presence in the global economy

6. Tangible sign of European identity

How does the euro promote trade and investment?

By providing a single currency that reduces extra costs, risks, and lack of transparency in cross-border transactions.

Makes the euro an attractive reserve currency for third countries, and gives the euro area a more powerful voice in the global economy

PRUDENT ECONOMIC MANAGEMENT

Also bring economic stability to the euro area, making it more resilient to so-called external economic shocks

SCALE AND CAREFUL MANAGEMENT

What are the purposes of the IMF?

• Promote international monetary cooperation.

• Facilitate expansion and balanced growth of trade.

• Promote exchange stability and orderly exchange arrangements.

• Assist multilateral payments systems and eliminate foreign exchange restrictions.

• Provide temporary financial resources for correcting balance-of-payment issues.

What is the IMF’s current role?

Support developing nations and maintain a stable international financial system.

What are the IMF’s challenges?

Operating deficiencies, global political environment, and loan conditions.

What are the two main bodies of the World Bank?

International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA).

Name additional institutions in the World Bank Group.

IFC, MIGA, ICSID.

IFC stands for

International Finance Corporation, established in 1956

MIGA stands for

Multilateral Investment Guaranty Agency, established in 1988

ICSID stands for

International Centre for Settlement of Investment Disputes, established in 1966

What are the purposes of these institutions: IFC, MIGA, ICSID.

• IDA: interest-free loans with sovereign guarantees

• IFC: loans, equity, risk management, structured finance

• MIGA: improves foreign direct investment in developing countries

• ICSID: dispute resolution between governments and private investors

What are the World Bank’s six strategic themes?

Poorest countries, postconflict/fragile states, middle-income countries, global public goods, Arab world development, sustainable growth.

This institutions typically provides interest-free loan to countries with sovereign guarantees

IDA

This institutions provides loans, equity, risk-management tools, and structured finance. Its goal is to facilitate sustainable development by improving investments in the private sector

IFC

Institution that focuses on improving the foreign direct investments of developing countries

MIGA

Institutions that provide the means for dispute resolution between governments and private investors with the end goal of enhancing the flow of capital

ICSID

Standardized core products, relatively uniform marketing, and integrated competitive strategies across international markets.

GLOBALIZATION IN INDUSTRY

Factors favoring industry globalization?

• Markets: homogeneous customer needs, global channels, transferable marketing

• Costs: large-scale/scope economies, learning/experience, sourcing efficiencies, favorable logistics, arbitrage, high R&D costs

• Policies: favorable trade policies, common tech/manufacturing/marketing regulations

• Competition: interdependent countries, global competitors

Reasons for global expansion?

1. to improve the cost-effectiveness of their operations

2. to expand into new markets for new customers

3. to follow global customers

Analyzing foreign markets for size, accessibility, cost, buyer needs, and practices to decide whether to invest.

International Market Due Diligence

Why is understanding regional differences important?

To avoid treating a country as a monolith and tailor strategies to local consumers.

What are key factors for differentiation and capability?

How products/services differ from competitors, proof of delivery capability, connections with potential customers.

What industry and political factors affect market entry?

Industry dynamics, political stability, legal security, and rule of law.

Common mistakes in international expansion?

1. Not researching prior to entry

2. not understanding competition

3. failing to offer targeted value propositions for buyers in the new market

How does firm size affect entry mode choice?

Small firms may begin with export strategy; large firms may pursue acquisitions for quick access/economies of scale.

What are typical middle-of-the-road entry modes?

Licensing, franchising, or partnerships in countries with sound rule of law.

Advantages of exporting?

Avoids cost of establishing operations in a new country.

Disadvantages of exporting?

High transport costs, tariffs, less control over distribution, distribution fees.

Granting permission to use IP rights (trademarks, patents, technology) under defined conditions in another country.

LISCENSING

Licensing plus providing a bundle of services and products to the franchisee for royalties.

FRANCHISING

Contractual agreement to cooperate for a common purpose; partner value may be tangible or intangible.

PARTNERSHIPS AND STRATEGIC ALLIANCES

Gaining control of another firm via stock purchase or price payment, offering quick market access but expensive.

ACQUISITIONS

Complex, costly, offers maximum control and potential high returns; firm retains control of all operations.

NEW WHOLLY OWNED SUBSIDIARY

Also called Greenfield Venture

New, Wholly Owned Subsidiary