Week 2 Flashcards
(29 cards)
What happened on 15. January 2015
terminate the minimum exchange rate of CHF 1.20 per Euro
Currency Risk
Vaue of currencies can fluctuate and with it the exchange rates
- currencies appreciate (go up)
- currencies depreciate (go down)
Demand for foreign exchange & supply of foreign exchange
- tourism
- trade
- investment
supply of foreign exchange:
- government
what happened in 2015 to the USD and what were the consequences
USD rose more than 20% against Euro and JPY.
- fewer tourists
- sales at stores decreased in the USA
what happened end of january 2015
Greece could not pay back their loans so the euro has less worth than USD
International financial management tasks
- choosing a capital structure
- raising funds for the firm
- managing working capital and cash flow
- performing cpaital budgeting
- managing currency risk
- managing the diversity of international accounting and tax practices
three types of currency exposure
transaction risks
translation risks
economic risks
transaction and its measures
transaction risk affects ongoign contractual transactions
measures:
usually reduced, or hedged by entering into currency swaps and other similar securities
translation exposure
translation exposure results when MNE translated financial statements denominated in foreign currency into the functional currency of the parent firm as part of consolidating international financial results.
Note that gains or lesses in translation exposure are paper or virtual, changes do not affect cash flow directly
economic exposure
results from exchange-rate fluctuations that affect the pricing of products and inputs and the value of foreign investments.
exchange rate fluctuation help or hur sales by making the firm’s products realtively more or less expensive for foreign buyers.
what does economic exposure affect
long-term profitability through changes in revenues and expenses. such effects are reflected in the firm’s financial statements
managing exposure to currency risk through hedging
forward contract
futures contract
currency options
currency swap
forward contract
exchange two currencies at a specified exchage rate on a set future date
futures contract
buy or sell a currency in exchange for another at a specified price ona speficied date. standard amounts and maturities apply.
currency option
gives the purchaser the right to buy a certain amount of foreign currency at a set exchange rate within a specified length of time –> call / put options
currency swap
exchange one curreny for another according to a specified schedule
Best practice in minimizing currency exposure
centralize currency management with the MNE
monitor changes in key currencies
monitor long-term economic and regulatory trends
decide on the level of risk the company can tolerate
distinguish economic exposure from transaction and translation exposures
emphasize flexibility in international operations
BIS
Bank of International settlement
- members: 60 central banks
- oldest one 1930 (in Basel)
- governors of 30 BIS member - bimonthly meetings to discuss recent developments
- mission: pursuite of monetary and financial stability, foster international cooperation and to act as a bank of central banks
Bretton woods institutions
international monetary fund (France)
- exchange rate stability
- monitors exchange systems
- provides funding to developing economies
Bretton woods institutions: special cases
soviet union
- soviet union at the conference, but did not ratify the agreement (cold war)
- in 1992 Russia joined both institutions
china
- PR china outside the system after 1949 revolution
- in 1980 PR china joined both institutions
switzerland
- joined the two institutions after a popular referendum in may 1992 (56% yes-votes)
key participants of the global monetary and financial system (Pyramid)
- Firm level
- the firm - national infrastructure level
- national stock exchanges and board markets
- commercial banks - national government level
- central banks - international organization level
- international monetary fund
- bank for international settlements
- world bank
constituency world bank group
Azerbaijan Kazakhistan Hyrgyzstan Poland Serbia Switzerland Tajikistan Uzbekistan
constituency AIIB
Denmark Hungary Iceland Norway Pland Sweden Switzerland United Kingdom
constituency IMF
Azerbaijan Kazakhistan Kyrgyzstan Poland Serbia Switzerland Tajikistan Turkmenistan Uzbekistan
