Prepared by Raymond Gottshaw

INTERNATIONAL
BUSINESS MANAGEMENT
(MGMT4806)
UNIT 4- International financial strategy
 Prepared by Raymond Gottshaw

OBJECTIVES

• After the lesson, students should:

• Describe three functions of the foreign exchange

market

• Identify the 3 main types of foreign exchange

instruments
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OBJECTIVES cont’d

• Explain at least 2 different types of exchange

rate regimes

• Illustrate at least one impact changes in

exchanges rates may have on international

businesses
 Prepared by Raymond Gottshaw

FOREIGN EXCHANGE (FX) MARKETS

The foreign exchange market (fx, forex or currency market) is

the market in which participants are able to buy, sell, exchange

and speculate on currencies.

Foreign exchange markets are made up of banks, commercial

companies, central banks, investment

management firms, hedge funds, and retail forex brokers and

investors. The forex market is considered the largest financial

market in the world

 Prepared by Raymond Gottshaw

FUNCTIONS OF THE FX MARKET

1. To convert the currency of one country into another

2. Provides a short-term credit to the importers so as to

facilitate the smooth flow of goods and services from
country to country. Eg bankers’ guarantee & letters of credit

3. Provides some insurance against foreign exchange risk

(hedging).
 Prepared by Raymond Gottshaw

FUNCTIONS OF THE FX MARKET

International businesses have 4 main uses for the fx

market:

 To convert funds they received from export, licensing

agreement etc.

 To pay for imports of goods, raw material etc.

 Prepared by Raymond Gottshaw

FUNCTIONS OF THE FX MARKET

 To invest surplus cash in the money market abroad

 Currency speculation:

Short term movement from one currency to

another to profit from shift in exchange rates.

 Prepared by Raymond Gottshaw

FX INSTRUMENTS
 Spot exchange rates

 Forward exchange rates

 Currency swaps
 Prepared by Raymond Gottshaw

FX INSTRUMENTS

Spot exchange rates

The rate at which a foreign exchange dealer
converts one currency into another on a
particular day.

When two dealers agree to exchange currency &

execute the deal immediately, the transaction is
referred to as spot exchange rates.
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FX INSTRUMENTS

Forward exchange rates

Forward exchange occurs when two parties
agree to exchange currency & execute the deal at
some specific date in the future. The rate used
is called the forward exchange rate.
 Prepared by Raymond Gottshaw

FX INSTRUMENTS
Currency swaps

The simultaneous purchase and sale of a given

amount of foreign exchange for two different value
dates.
 Prepared by Raymond Gottshaw

EXCHANGE RATE REGIMES

An exchange-rate regime is the way an authority manages

its currency in relation to other currencies and the

foreign exchange market.

 Prepared by Raymond Gottshaw

EXCHANGE RATE REGIMES

Floating exchange rate

A floating exchange rate is a regime where

the currency price is set by the forex market based

on supply and demand compared with other currencies

 Prepared by Raymond Gottshaw

EXCHANGE RATE REGIMES

Fixed exchange rate

A fixed exchange rate is a country's exchange rate regime

under which the government or central bank ties the official
exchange rate to another country's currency or gold.
 Prepared by Raymond Gottshaw

EXCHANGE RATE REGIMES

Dirty float
A dirty float is an exchange rate regime in which the
country's central bank occasionally intervenes to change the
direction or the pace of change of the country's currency value.
In most instances, the intervention aspect of a dirty float system
is meant to act as a buffer against an external economic shock.

This policy was adopted by China in 2005.

 Prepared by Raymond Gottshaw © 2017

EXCHANGE RATE REGIMES

Dollarisation

Dollarisation is the situation where a country replaces its

domestic currency with the currency of another country.

It can be official, semi-official or unofficial.

 Prepared by Raymond Gottshaw

QUESTIONS
1. The following is a foreign exchange regime:

a. Spot exchange rates

b. Forward exchange rates

c. Floating exchange rates

d. Currency swaps
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QUESTIONS
2.________ is the way an authority manages its
currency in relation to other currencies and the
foreign exchange market.

a. Fixed exchange rates

b. Monetary policy

c. Exchange rate regime

d. The central bank

 Prepared by Raymond Gottshaw

QUESTIONS
3. A forward contract is used to hedge against a foreign
exchange risk

a. True
b. False
 Prepared by Raymond Gottshaw © 2017

QUESTIONS
4. The foreign exchange market is considered to be
the largest financial market in the world

a. True
b. False
 Prepared by Raymond Gottshaw © 2017

QUESTIONS
5. A simultaneous purchase and sale of foreign
exchange for two different dates

a. currency devalue

b. currency swap

c. currency valuation

d. currency exchange
 Prepared by Raymond Gottshaw © 2017

QUESTIONS
6. A firm that buys foreign exchange in order to take
advantage of higher foreign interest rates is

a. Speculating.

b. Demonstrating purchasing power parity.

c. Engaging in interest rate arbitrage.

d. Responding to fluctuations in the business cycle.

 Prepared by Raymond Gottshaw © 2017

QUESTIONS
7. In order to protect against foreign exchange risk,
firms can use

a. The spot market for foreign exchange.

b. Interest rate arbitrage.

c. Purchasing power parity.

d. The forward market for foreign exchange.

 Prepared by Raymond Gottshaw © 2017

QUESTIONS
8. Which of the following would NOT be a cause for an
increased American demand for the euros?

a. The United States having lower interest rates than the Euro
area

b. Increased American demand for Euro Area goods

c. The expectation by speculators that the value of the euro is

edging up

d. More economic expansion in the United States

 Prepared by Raymond Gottshaw © 2017

QUESTIONS
9. Exchange rates are determined in

a. The money market

b. The foreign exchange market

c. The stock market

d. The capital market

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END OF LESSON ACITIVITY

LET’S PLAY JEOPARDY!!!!
Prepared by Raymond Gottshaw
Prepared by Raymond Gottshaw