LOGO

Chapter 9

The Foreign Exchange Market

LOGO

Contents

Introduction1

The Functions of the Foreign Exchange Market2

Economic Theories of Exchange Rate Determination 3

Implications for Managers4

LOGOIntroduction

Question: What is the foreign exchange market?

Question: What is the exchange rate?

LOGOImplications for Managers

Firms must understand the influence of exchange rates on the profitability of trade and investment deals

This exchange rate risk can be divided into 1. Transaction exposure2. Translation exposure3. Economic exposure

LOGO

Kurs Bank MandiriMata Uang Symbol Beli Jual

United States Dollar USD 11.818,00 11.982,00

Australian Dollar AUD 10.646,00 10.944,00

Canadian Dollar CAD 10.723,00 10.999,00

Swiss Franc CHF 12.514,00 12.968,00

New Zealand Dollar NZD 9.616,00 9.877,00

Danish Krone DKK 1.987,00 2.159,00

British Pound GBP 19.213,00 19.596,00

Hongkong Dollar HKD 1.482,00 1.591,00

Japanese Yen JPY 109,11 112,78

Singapore Dollar SGD 9.303,00 9.554,00

EURO Spot Rate EUR 15.251,00 15.584,00

Saudi Arabian Real SAR 3.041,00 3.313,00

Swedish Krona SEK 1.616,00 1.727,00

Norwegian Krone NOK 1.769,00 1.958,00

China Yuan CNY 1.893,00 1.984,00

LOGO

LOGO

LOGOThe world's least valuable currencies

Ja

Japanese yen

10

LOGO

09

Kenyan shilling

LOGO

08

Pakistani rupee

LOGO

07

hungarian-forint

LOGO

06

Chilean Peso

LOGOThe Functions of

the Foreign Exchange Market

Question: What is the purpose of the foreign exchange market?

The foreign exchange market1. enables the conversion of the currency of

one country into the currency of another2. provides some insurance against foreign

exchange risk (the adverse consequences of unpredictable changes in exchange rates)

LOGOInsuring Against Foreign Exchange Risk

The foreign exchange market can be used to provide insurance to protect against foreign exchange risk (the possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm)

A firm that protects itself against foreign exchange risk is hedging

LOGO

Spot exchange rates

Forward exchange rates

Currency swaps

Hedging

LOGOEconomic Theories of Exchange Rate Determination

Question: What factors are important to future exchange rates?

Three factors that have an important impact on future exchange rate movements are

1. a country’s price inflation

2. a country’s interest rate

3. market psychology

LOGO

Mengapa Rupiah Anjlok?

LOGOCase Study: Tebang Pilih Investasi Pasar Berkembang

LOGOPrices and Exchange Rates

Question: How are prices related to exchange rate movements?

To understand how prices and exchange rates are linked, we need to understand the law of one price, and the theory of purchasing power parity

LOGOPrices and Exchange Rates

The law of one price states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency

Purchasing power parity theory argues that given relatively efficient markets (markets in which few impediments to international trade and investment exist) the price of a “basket of goods” should be roughly equivalent in each country

LOGOCase Study

Big Mac price and the exchange rate: An application of purchasing power parity.Sumber: The Economist

LOGOInterest Rates and Exchange Rates

Question: How do interest rates affect exchange rates?

The Fisher Effect states that a country’s nominal interest rate (i) is the sum of the required real rate of interest (r ) and the expected rate of inflation over the period for which the funds are to be lent (l ) In other words, i = r + I

So, if the real interest rate is the same everywhere, any difference in interest rates between countries reflects differing expectations about inflation rates

LOGOInterest Rates and Exchange Rates

The International Fisher Effect suggests that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries

In other words: (S1 - S2) / S2 x 100 = i $ - i ¥ where i $ and i ¥ are the respective nominal interest

rates in two countries (in this case the US and Japan), S1 is the spot exchange rate at the beginning of the period and S2 is the spot exchange rate at the end of the period

LOGO

05

korean-won

LOGO

04

Tanzanian Shilling

LOGO

03

Colombian Peso

LOGORUPIAH

LOGO

01

Vietnamese Dong

LOGOSummary

Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates, but poor predictors of short term changes

So, international businesses should pay attention to countries’ differing monetary growth, inflation, and interest rates

LOGOImplications for Managers

Question: What does the foreign exchange market

mean for international firms?

LOGOShould The UK Be A Member Of The Euro?

LOGOIs Europe an Optimal Currency Zone?

Price Transparency

Promotes TradeCurrency Stability and TransparencyPromotes Competition

LOGO

UK Entry the Euro

Lost TradeLower Foreign InvestmentWeaker Financial MarketReduced CompetitivenessConvergenceEuro Policy and Politics

LOGO

Cu Next Week

LOGOExchange Rate Risk

1

Transaction exposure

2

Translation exposure

3

Economic exposure

LOGO

LOGOExchange Rate Risk

LOGOInsuring Against Foreign Exchange Risk

LOGO

Hot Tip

How do I incorporate my logo to a slide that will apply to all the other slides?

On the [View] menu, point to [Master], and then click [Slide Master] or [Notes Master]. Change images to the one you like, then it will apply to all the other slides.

LOGO

Diagram

ThemeGallery is a Design Digital Content & Contents mall developed by Guild Design Inc.

TitleAdd your text

ThemeGallery is a Design Digital Content & Contents mall developed by Guild Design Inc.

LOGO

Cycle Diagram

Text

TextText

Text

Text

Cycle name

Add Your Text

LOGO

Diagram

Text

Text

Text

Add YourTitle Text

•Text 1•Text 2•Text 3•Text 4•Text 5

Add YourTitle Text

•Text 1•Text 2•Text 3•Text 4•Text 5

Text

Text

LOGO

Diagram

Concept

Add Your Text

Text

Text

Text

Text

Text

Text

LOGO

Diagram

Add Your Text

Add Your Text

Add Your Text

Add Your Text

Add Your Text

Add Your Text

Add Your Text

Add Your Text

LOGO

Diagram – PowerPoint2002

Add Your Text

Add Your Text

Add Your Text

Add Your Add Your TitleTitle

LOGO

Diagram

Add Your TextAdd Your Text Add Your TextAdd Your Text Add Your TextAdd Your Text

Text Text Text

LOGO

Diagram

Add Your TitleAdd Your Title

Text

Text

Text

Text

LOGO

Diagram

Title

Add Your TextAdd Your Text

Add Your Text

Add Your Text

Add Your Text

Add Your Text

LOGO

Diagram

1

ThemeGallery is a Design Digital Content & Contents mall developed by Guild Design Inc.

2

ThemeGallery is a Design Digital Content & Contents mall developed by Guild Design Inc.

3

ThemeGallery is a Design Digital Content & Contents mall developed by Guild Design Inc.

LOGO

Diagram

Your Text

Your Text

Your Text

Your Text

Your Text

Your Text

Your Text

Your Text

2001 2002 2003 2004

LOGO

Progress Diagram

Phase 1Phase 1 Phase 2Phase 2 Phase 3Phase 3

LOGO

Block Diagram

TEXT TEXT TEXT TEXT

TEXT TEXT TEXT TEXT

LOGO

Table

TEXT TEXT TEXT TEXT TEXT

Title A

Title B

Title C

Title D

Title E

Title F

LOGO

Text1

Text2Text3

Text5

Text4

3-D Pie Chart

LOGO

Marketing Diagram

Add Your TextAdd Your TextAdd Your TextAdd Your Text

Add Your Title here

Text1Text1Text1Text1

LOGO

www.themegallery.com

www.themegallery.com