MGNM578

International Business Environment

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Poll

Q. Most trade agreements contain countries in the same area of the world. Why is this so?

a) The distances that goods need to travel between such countries are short.

b) Distribution channels are not easily established in adjacent countries.

c) Adjacent countries are reluctant to coordinate policies.

d) Neighboring countries usually lack a common history and interests.

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Learning
Outcome

• After this Lecture, you will be able to

• illustrate the role of International Monetary Fund in
international business operations.
The International Monetary Fund

• It is an organization of 190 countries, working to foster global monetary

cooperation, secure financial stability, facilitate international trade,
promote high employment and sustainable economic growth, and
reduce poverty around the world.
Brief History of IMF

• In 1944, toward the close of World War II, the central allied governments met in
Bretton Woods, New Hampshire, to determine what was needed to bring
economic stability and growth to the post-war world.
• As a result of those meetings, the IMF came into official existence on December 27,
1945, to promote exchange rate stability and facilitate the international flow of
currencies.

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Objectives of The International Monetary Fund

• Foster global monetary cooperation,

• Secure financial stability,
• Facilitate international trade,
• Promote high employment & sustainable economic growth, and
• Reduce poverty around the world
News Article

https://economictimes.indiatimes.com/news/international/world-news/imf-calls-for-expansion-of-debt-relief-beyond-worlds-poorest-
countries/articleshow/79356140.cms
IMF calls for debt relief beyond the world's poorest countries during a pandemic to help them survive

• The debt treatment framework endorsed by G20 leaders applied to 73 countries that
were eligible for a temporary freeze in official bilateral debt payments during the
pandemic.
• In addition, the head of the International Monetary Fund called for prompt and
effective implementation of a new G20 framework set up to help the world's
poorest countries reach permanent debt relief. This move by IMF fulfills one of its
objectives of securing financial stability.

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News Article

https://economictimes.indiatimes.com/news/international/business/imf-chief-kristalina-georgieva-says-much-more-decisive-action-
needed-to-deal-with-debt-problems/articleshow/78735593.cms
News Article

https://economictimes.indiatimes.com/news/international/business/imf-cuts-asias-growth-forecast-warns-of-pandemic-driven-risks/
articleshow/78790805.cms
News Article

https://www.imf.org/en/News/Articles/2020/04/30/pr20197-japan-boosts-contributions-imf-catastrophe-relief-fund-poverty-reduction-
growth-trust
Synopsis

• Japan is the largest contributor to IMF financial resources and the most significant contributor
to the Fund's concessional lending facilities.

• Japan is the largest PRGT (Poverty Reduction and Growth Trust) lender and grant contributor
among all IMF member countries. In addition, Japan provided an additional US$100 million
contribution to the IMF's Catastrophe Containment and Relief Trust as immediately

• The Poverty Reduction and Growth Trust allows the International Monetary Fund to provide
concessional financial support to low-income countries to help them achieve, maintain, or restore a
stable and sustainable macroeconomic position consistent with solid and durable poverty
reduction and growth.

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 What the IMF does?

The work of IMF is of three main types:

• Surveillance-Surveillance involves monitoring economic and financial developments and the
provision of policy advice aimed primarily at crisis prevention. The IMF identifies potential risks to
stability and recommends appropriate policy adjustments needed to sustain economic
growth and promote financial and economic stability

• Lending - The IMF also lends to countries with balance of payments difficulties, providing
temporary financing and supporting policies aimed at correcting the underlying problems; loans to
low income countries are also aimed at poverty reduction.

• Technical Assistance- training

How does the IMF decide the amount of funds to be provided to different economies
The IMF Quota

• When a country joins the IMF, it contributes a certain sum of money, called a quota,
broadly based on its relative size in the global economy.
• It is the basis on which the IMF allocates special drawing rights (SDRs).
• The Quota determines the voting rights of the individual members.
• The IMF's largest member is the United States, with a quota of SDR 83 billion and
the smallest member is Tuvalu, with a quota of SDR 2.5 million
Special Drawing Rights

• It is an international reserve asset given to each country to help increase its

reserves.
• It is the unit of account in which the IMF keeps its financial records.
• (Currencies making up the SDR basket are the U.S. dollar, the euro, the Chinese
yuan, the Japanese yen and British pound)
The Role of the IMF in Global Financial Crises

• An important responsibility of the IMF is to monitor and assess vulnerabilities of the

economic and financial policies of member countries in relation to domestic and
global stability.
News Article

https://www.imf.org/en/News/Articles/2020/04/24/pr20190-mozambique-imf-executive-board-approves-emergency-assistance-to-
address-covid-19.
News Article

https://www.bloomberg.com/news/articles/2020-03-17/venezuela-requests-5-billion-from-imf-to-fight-coronavirus
News Article

https://www.theguardian.com/commentisfree/2019/aug/27/imf-economics-inequality-trump-ecuador
News Article

https://www.imf.org/external/pubs/ft/fandd/2019/06/the-future-of-the-imf-wolf.htm
IMF Future Outlook

“We have come to recognize that the wisest and most effective
way to protect our national interests is through international
cooperation—that is to say, through united effort for the
attainment of common goals.”
US Treasury Secretary Henry Morgenthau,
Jr., closing address at Bretton Woods Conference, July 22, 1944
Future Ahead
Changes Impacting Future of IMF

• Shift in global economy and political power.

• Transformation in great-power rivalry.
• Turn towards populist politics.
• Slowdown of globalization.
International Financial Market

• The International Financial Market is where financial wealth is traded

between individuals (and between countries).
• It can be seen as a comprehensive set of rules and institutions where
assets are traded between agents in surplus and agents in deficit and
where institutions lay down the rules.

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Foreign Exchange Market

• It is an over-the-counter (OTC) global marketplace that determines the exchange rate for currencies
worldwide.

• Exchange Rate is the price of a currency specifically, the number of units of one currency that buy
one unit of another currency.

• Reporting Dealers
• Financial Institutions
• Nonfinancial Institutions

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Three major categories of Foreign Exchange Markets

• Reporting Dealers - Also known as money center banks, large financial institutions actively
participate in local and global foreign exchange and derivate markets. They are widely assumed to
include the largest banks and financial institutions in terms of overall market share in foreign-
exchange trading, such as Deutsche Bank, Citi Bank, HSBC, JP Morgan, etc.

• Financial Institutions - Other Financial Institutions are not classified as reporting dealers. They
include smaller local and regional commercial banks, investment banks and securities houses,
hedge funds, pension funds, money market funds, currency funds, mutual funds, specialized
foreign-exchange trading companies, and so forth

• Nonfinancial Institutions- Nonfinancial Institutions like Western Union is a nonbanking financial

institution that deals in foreign exchange.

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Ways of Doing Foreign Exchange

• Directly with customers,

• Through voice brokers,
• Through electronic brokerage systems
• Directly through interbank

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The foreign exchange market has two major segments:

• The over-the-counter market (OTC) comprises commercial banks as just described, investment
banks, and other financial institutions.

• The exchange market (Securities Exchanges) comprises securities exchanges, such as the CME
Group, NASDAQ OMX, and Intercontinental Exchange (ICE), where certain foreign exchange
instruments, such as futures and options, are traded

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Global Over-the-counter market foreign exchange instruments are:

• Spot transactions -It involves the exchange of currency for delivery in two business days after the day
the transaction was made. For example, A bank would quote an exchange rate for a Monday, but delivery
would take place on Thursday. The rate at which the transaction is settled is the spot rate.

• Outright forward transaction -It involves the exchange of currency on a future date beyond two
business days. It is the single purchase or sale of a currency for future delivery.

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• FX swap -One currency is traded for another on one date and then swapped back later.

• Currency swaps -It deals with interest-bearing financial instruments such as bonds and involves the
exchange of principal and interest payments.

• Options-A currency option (also known as a forex option): is a contract that gives the buyer the right,
but not the obligation, to buy or sell a particular currency at a specified exchange rate on or before a
specified date. For this right, a premium is paid to the seller.

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Major Foreign Exchange markets

• The Spot Market

• The Forward Market
• Options
• Futures

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• The Spot Market: Rates are quoted by foreign exchange dealers. The bid (buy) rate is the price at
which the dealer is willing to buy the foreign currency; the offer (sell) is the price at which the dealer
will sell foreign currency. The difference between the bid and offer rates is the dealer's profit margin.

• The Forward Market : The forward rate is the rate quoted for transactions that call delivery after two
business days. A forward discount exists when the forward rate is weaker than the spot rate.
Conversely, a premium exists when the forward rate is stronger than the spot rate.

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• Options - An option is a right, but not the obligation, to trade a foreign currency at a specific exchange rate.

• Futures - A futures contract specifies an exchange rate in advance of the actual exchange of currency, but it is not as flexible
as a forward contract.

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The Foreign-Exchange Trading Process

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Exchange-Rate Determinants

• Hard Peg
• Soft Peg
• Floating Arrangement

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THANK YOU

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