Term
| Why are International Equity Markets growing? |
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Definition
1. Countries are selling businesses/ Investor groups are buying
2. Economic growth in emerging markets (Russia)
3. Global Banks are working hard to introduce stock buyers/ sellers |
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Term
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Definition
o Unregulated (Risky)
o Money (currency) is parked outside of home nation
o Who traffics the euro currencies?
• Governments with huge trade surpluses
• Huge Global Banks with lots of excess cash
• International companies with lots of excess cash
• Some very rich people (Michael Bloomberg Rich - $50 Billion Net Worth) |
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Term
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Definition
o Money gets exchanged
• Price of money = Supply and Demand
• Bid Quote: Price bank pays for a currency
• Ask Quote: Price at which the bank seeks to sell the currency
• Bid-Ask Spread: The price the banks sells currency between the these (the difference) |
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Term
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Definition
• November 3 - Exchange Rate for PESO/USD = 15
o Denominator – Base Currency
o Numerator – Quoted Currency
• When Foreign Currency gets Stronger = USD gets Richer
• When Foreign Currency gets Weaker = USD gets Poorer
• To Hedge
o Contract with the bank to get PESO for USD at a set exchange rate identified today |
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Term
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Definition
o Can convert PESO to USD at a set rate, or we can not convert at all if the set rate is to high compared to todays rate
o Options usually cost more
• EGP/USD = 5.7055
o EGP – Quoted Currency
• Direct Quote
o USD – Base Currency
• Indirect Quote
• Direct Quote would be
• USD/EGP = 1/5.7055
= 0.1753 |
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Term
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Definition
o Are specific exchange rates at which two or more parties agree to exchange currencies on a specific future date
o Companies buy forward contracts to protect themselves from uncertainties |
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Term
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Definition
• Simultaneous buying and selling of foreign exchange for two different dates
• Reduces the likely hood of currency fluctuations will hurt our business |
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Term
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Definition
o Strong nations desire their currencies to be strong
• Strong nations favor trading in their currencies
o Some nations don’t want their currencies heavily traded
• Example: Russia
• They think it weakens their economy
o If it was traded openly, it would show that the demand for Russia’s currency is weak
• They will restrict the buying and selling of currency
o Wants to keep enough of own currency in its central bank to pay its foreign bills
o Wants to keep enough of own currency in its central bank to pay for imports
• How to discourage trading in their currency
o Central bank must approve all foreign exchange transactions
o Can mandate higher exchange rates for Russian companies importing foreign goods
o Government can set limits on the amount of own currency their citizens take to foreign countries |
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Term
| How Exchange Rates can Influence Business Activities |
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Definition
o Russia – RUB is weak
• Russian products are less expensive
o USA – USD is very strong
• USA products will cost more |
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Term
| What Affects Exchange Rates |
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Definition
1. Inflation
a. Nations may seek to achieve a goal of either a strong or weak currency
i. Strong
1. Revaluation – deliberately keeping high value of currency
2. Example – Switzerland
3. Importers gain
4. Exporters loss
ii. Weak
1. Devaluation – deliberately lowering value of currency
2. Exporters gain
3. Importers loss
4. Example - China
b. Lowers peoples purchasing power
c. High Inflation
i. Weakens currency
d. Low Inflation
i. Strengthens currency |
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Term
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Definition
| • An identical product must have an identical price in all nations when price is expressed in a common currency |
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Term
| Impact of Unemployment on Exchange Rates |
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Definition
o When unemployment falls, usually inflation rises = Weaker home currency
o When unemployment rises, usually inflation falls = Stronger home currency |
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Term
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Definition
• Amount of money government spends when it buys Goods and Services
• (Tight Fiscal Policy) When inflation is high, government spends less on goods and services |
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Term
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Definition
• Set by the Central Bank
• Influences the amount of money circulating in the country
• Central Bank wants to cut inflation rates, they sell government bonds
• Less money circulating (less money people are spending) |
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Term
| Government Officials use what policies to control inflation and consequently, their currencies strengthen or weaken |
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Definition
| Fiscal and Monetary Policy |
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Term
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Definition
• Value of currency linked to nations gold
• Fixed Exchange Rate
• If USA had 4 times the gold as Russia
o Exchange Rate: RUB/USD = 4
• Advantages:
• Provided Stability
• Imposed Strict Monetary Policies on nations
o Government cant print out more money than it has Gold to support |
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Term
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Definition
• Since USA has enormous reserves of gold
• Link the US Dollar to the value of gold
• Other Currencies values are determined by how strong or weak they are relative to the US Dollar
• Created International Monetary Funds
o World Bank
• Located in Washington D.C
• No Financial Crisis during this time frame
• Economic stability |
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Term
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Definition
• To many USD in circulation
o Trade Deficit
• Importing to much
o Huge Budget Deficits
• Social Improvement Programs
• Food Stamps
o Spending Huge Amounts of Money in Vietnamese War
• Government steps in when Currency gets to strong or to weak
• Lots of Financial Crisis’s |
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Term
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Definition
1) Create a mission statement
a. Identify goals
2) Analyze the business environment
a. SWOT analysis
i. Strengths, Weaknesses - Internal
ii. Opportunities, Threats – External |
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Term
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Definition
• Adapts its products to different countries
• Different product for different companies
• Examples: McDonalds, Mattel |
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Term
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Definition
• Doesn’t vary its product line around the world
• Examples: Apple, Nike |
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Term
| Centralized Decision Making |
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Definition
o Top Management makes all the decisions
• Supervisors/ Managers just do what they are told
o Global Company |
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Term
| Decentralized Decision Making |
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Definition
o Managers throughout the organization get empowered
o Multi-National Company |
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Term
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Definition
• We hire employees from the home country
• Why?
• We seek to recreate the home office in a foreign country
• Home nation employees will protect the companies interest better than those foreigners |
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Term
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Definition
| • We hire employees from host nation |
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Term
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Definition
| • We hire the best, foreign or not |
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Term
| Why do International Capital Markets exist? |
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Definition
(1) to expand the money supply for borrowers
(2) to reduce interest rates for borrowers
(3) to reduce the risk lenders face. |
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Term
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Definition
| instant buying and selling of currencies to make a profit |
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Term
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Definition
| buying & selling a currency in hopes that its value will increase |
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Term
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Definition
| deliberately lowering the value of its currency |
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Term
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Definition
| deliberately raising a nation’s currency |
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Term
| Factors that shape exchange rates |
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Definition
- Law of One Price
- Inflation |
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Term
| The International Fisher Effect |
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Definition
- Holds that a difference in nominal interest rates in two nations is due to different expected rates of inflation in those nations.
- When nation one has inflation higher than nation two, nation one should see the value of its currency fall when compared to the currency of nation two. |
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Term
| Advantages of Multi-National Strategy |
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Definition
• Company can tailor its product line to specific needs and wants of society
• Can monitor customer taste and change rapidly |
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Term
| Disadvantages of Multi-National Strategy |
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Definition
| • Doesn’t achieve economies of scale |
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Term
| Advantages of Global Strategy |
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Definition
| • Can achieve economies of scale |
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Term
| Disadvantages of Global Strategy |
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Definition
| • Can’t tailor our product to specific nations demands |
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Term
| Advantages Polycentric Staffing |
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Definition
• Managers know the country culture
• Eliminates the high cost of sending home country people above |
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Term
| Disadvantages Polycentric Staffing |
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Definition
| • Home office loosing control of the foreign operation |
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Term
| Advantages Ethnocentric Staffing |
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Definition
| • The employees we hire, they know the way our company operates |
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Term
| Disadvantages Ethnocentric Staffing |
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Definition
• Cultural illiterate
• Expensive to send people to overseas |
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