Lecture notes
Lecture 14
- Institution
- Royal Holloway University Of London
INTERNATIONAL MONETARY SYSTEM
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22/11/2019LECTURE 14: INTERNATIONAL MONETARY SYSTEM
TODAY’S TOPICS TODAY’S LEARNING OUTCOMES
• Foreign exchange markets By the end of this session you will be able to:
• Protecting against exchange risk • Review the basic characteristics of international
• Foreign money and capital markets financial markets
• Offshore finance and capital markets • Examine the foreign exchange market, its
operation and main participants
Executive headaches: How can an • Show how firms can operate successfully in more
international business get decreasing than one currency
revenues from increasingly profitable
subsidiaries?
SCENARIO 1 (UNLIKELY, BUT ILLUSTRATIVE)
Positive
Overseas sales and profits up (10%)
Negative
Euros/USD/AUD currency drops against the GBP (-20%)
Subsidiary gains don’t translate into profits and dividends for shareholders
Scenario 2
Reduced labour costs
Unwarranted executive bonuses
GBP becomes weak, overseas currencies grow stronger: Company profits go up without doing
anything…
WHY WOULD A SUPERDRY EXECUTIVE BE
CONCERNED ABOUT BORROWING MONEY IN USD? Answer is C.
A. It wouldn’t be a problem Often it can be cheaper to borrow money from
B. High broker fees a bank in another country with a different
C. $/£ exchange rate currency.
D. Tax problems
INTERNATIONAL MONEY MANAGEMENT
• Managing FDI, subsidiary income, foreign exchange, production costs is complex and risky
• Companies that measure income in billions can see big changes in profits/loss based on foreign
exchange FOREX movements
• One benefit of the EURO – eases trade and transaction costs
Benefit of the euro is that all trade between European countries is easier
, FINANCE RISK
• All international activities involve exchange risk
• Exchange risk: the risk of financial loss or gain due to an unexpected change in a currency’s value
• Risk needs to be manged, which supports a substantial banking sector
• Operates through the foreign exchange (FOREX) market
SOME DEFINITIONS
• FOREIGN EXCHANGE: Any financial instrument that carries out payment from one currency to
another
• EXCHANGE RATE: The amount of one currency that can be obtained for another currency – holiday
cash
• SPOT RATE: The rate quoted for current foreign currency transactions
• FORWARD RATE: Rate quoted for the delivery of foreign currency at a predetermined future date
such as 90 days from now
(handy is you want to transfer subsidiary income to the parent)
When things go into international markets it becomes all more difficult
Exchange rates keep changing (Euro-Pound exchange rate keeps changing every second)
WHAT IS THE AVERAGE DAILY VOLUME OF FOREX TRADED IN THE US?
A. $232.0 billion
B. $463.1 billion Answer is C.
C. $893.2 billion
D. $1.3 trillion
FOREX MARKETS
There are two major ways of conducting foreign exchange
1. Between banks
The interbank market for foreign exchange involves transactions between banks. Global banks have plenty
of deposits in multiple currencies
Interbank – literally bank to bank
2. Between brokers
Exchange brokerage companies make markets in foreign currencies. Brokers do not take currency positions,
simply match buyers and sellers and charge a commission for their services
How do you start to exchange money?
1. Really large investment between banks (eg. how I pay uni fees)
2. Move money between 2 different parties
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