...have to pay a Japanese exporter in yen, a German in Euros, and a British in Pounds. For these reasons both the Australian and the US importer will have to buy these currencies with dollars in the foreign exchange market, which determines how many dollars will be needed in an exchange for each currency. In the world economy the difference between making business domestically and internationally differs under many distinct levels. However, for the purpose of this essay this paper will focus on foreign exchange respectively in context of international business under fixed and floating exchange rate. Conducting business both domestically and internationally involves understanding the foreign exchange market, and selecting the best exchange rate system for your business. This paper has three distinct purposes. First it will outline a clear definition of both fixed and floating exchange rate system. Second, it will discuss the costs and benefits of both systems. And finally it will state the most preferred and widely used system between the two systems. An exchange rate is the rate or the price at which one currency is worth when converted into that of another. In a foreign transaction, the foreign exchange market is where these activities take place. In definition, the foreign exchange market is “a market for converting the currency of one country into that of another country” (Hill, Cronk & Wickrammasekera, 2008, p134) and allow participants to buy and sell foreign currencies. Individuals...
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...Unit – Introduction to International finance ‘A’ section. G01 1) What is the objective of International Business? 2) What is MNC? 3) What are the components of Input market? 4) Name the various sources at the micro level of a company? 5) As for as India is concerned what is the Macro view of foreign flow? 6) What you mean by output market? G02 1) What you mean by sectoral Interdependence? 2) What is Foreign exchange risk and Political risk? 3) How licensing and franchising are different? 4) What motivates International Business? Section B G03. 1) Bring out the various factors of differences leading to interdependence. 2) At the micro level of a company what are the sources of Finances? 3) What are the significance of input market and output market? 4) What is the relevance of international finance to a corporate executive? G04 1. What are the distinguishing features of International finance? 2. What are the key decision areas in International Financial Management? 3. What is market imperfection in international finance? 4. What are the various risks involved in international finance? 5. What is the scope of international finance? Section C G05 1) “The emergence of International trade is attributed to sectoral interdependence and...
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...International Finance: A Course Overview Mihir A. Desai* Harvard University and NBER ABSTRACT This paper describes the International Finance course at Harvard Business School for instructors considering adopting the associated material. The paper begins by arguing that the forces of globalization have fundamentally changed the scope and activities of firms thereby altering the practice of finance within these firms. As a consequence of an increasing reliance on tightly-integrated foreign operations, a parallel world of finance has been opened within every multinational firm and this world has, heretofore, been overlooked. The course materials are designed to address the many aspects of financial decision making within global firms prompted by these changes that are not addressed in traditional materials. The paper provides an overview of the structure of the course and its seven modules with particular emphasis on the three modules that constitute the core of the course. The paper also describes an analytical framework that has been developed through the creation of the course materials to guide critical financial decisions on financing, investment, risk management and incentive management within a multinational firm. This framework emphasizes the need to reconcile conflicting forces in order for multinational firms to gain competitive advantage from their internal capital markets. The paper concludes with a discussion of the course's pedagogical approach and detailed descriptions...
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...international business. In this context, we focused mainly on the evolution of the international monetary system and monetary institutions that facilitate international trade and investment. (1a) Marking the benchmarks along your route (i.e. Bretton Woods, Smithsonian, Jamaica, Plaza, and the Louvre Accords, etc), trace this evolution from its origins in the gold standard, through the fixed and the floating exchange rate systems to the managed float (target zone) system we are living in today. Answer: Since known history of mankind exchange of goods and services of value had been going on between individuals, groups and tribes/nations. By the passage of time it developed through barter system to gold coins etc. In modern times starting from the last century, the evolution of institutional environment of international business and monetary system as well as monitory institutions have been developed to streamline the trade and investment among the nations. Going through the various stages of evolution from the origin in the gold standard and development to present time floating exchange rate system and to explained the workings of the international monetary system and pointed out its implications for international business we make Bretton Woods followed by Jamaica, Plaza, and the Louvre Accords, etc. To further elaborate the topic it is imperative to describe each of these concepts briefly as under: • The Gold Standard: It is monetary standard which link currencies to gold and provides...
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...manufacturing that does not change with volume but changes with passage of time or much higher quantity .it is fixed for a certain defined relevant range I n the short run but will change in long run. De Costa (1996) describes fixed costs as those costs which volume can be spread and identifies equipment and plant as limiting factors of production. When volume increase fixed costs remain unchanged up to a certain point that is the level accommodated by the available plant and equipment .Edwards J. D (1965)on the other hand gives two perspectives on fixed costs where direct costing treats fixed costs as period costs and are excluded from product costs. He goes on to note that depreciation is assumed fixed by direct costing but in the long run it is variable. The other perspectives noted by accounts who just measure and match revenue and expenses hence the definition and classification of fixed costs is the same in the long run . Ali Fekrat M(1972)explains that the division of costs into fixed and variable makes sense in the short run. He goeson to explain the two viewsof accounts and microeconomics whobndefine factors of production and services yielded by those factors. He echoes the same sentiments as above about direct costing and fixed...
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...devaluation of the ruble and the default on public and private debt.1 Currency crises such as Russia’s are often thought to emerge from a variety of economic conditions, such as large deficits and low foreign reserves. They sometimes appear to be triggered by similar crises nearby, although the spillover from these contagious crises does not infect all neighboring economies—only those vulnerable to a crisis themselves. In this paper, we examine the conditions under which an economy can become vulnerable to a currency crisis. We review three models of currency crises, paying particular attention to the events leading up to a speculative attack, including expectations of possible fiscal and monetary responses to impending crises. Specifically, we discuss the symptoms exhibited by Russia prior to the devaluation of the ruble. In addition, we review the measures that were undertaken to avoid the crisis and explain why those steps may have, in fact, hastened the devaluation. The following section reviews the three generations of currency crisis models and summarizes the conditions under which a country becomes vulnerable to speculative attack. The third section examines the events preceding the Russian default of 1998 in the context of a currency crisis. The fourth section applies the aforementioned models to the Russian crisis. A CURRENCY CRISES: WHAT DOES MACROECONOMIC THEORY SUGGEST? A currency crisis is defined as a speculative attack on country A’s currency, brought about by Abbigail...
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...Solutions for exchange rate policy of transition economy of Vietnam Dissertation zur Erlangung des Grades Doktor der Wirtschaftswissenschaft (Doctor rerum politicarum, Dr. rer. pol.) der Juristischen und Wirtschaftswissenschaftlichen Fakultät der Martin-Luther-Universität Halle-Wittenberg vorgelegt von M.A. Mai Thu Hien geb. am 23. August 1976 in Hanoi, Vietnam Gutachter: 1. Prof. Dr. Dr. h.c. Rüdiger Pohl, Martin-Luther-Universität Halle-Wittenberg 2. Prof. Dr. Martin Klein, Martin-Luther-Universität Halle-Wittenberg Datum der Einreichung: 07.06.2007 Datum der Verteidigung: 12.07.2007 Halle (Saale), Juli 2007 urn:nbn:de:gbv:3-000012127 [http://nbn-resolving.de/urn/resolver.pl?urn=nbn%3Ade%3Agbv%3A3-000012127] 2 Acknowledgements This doctoral dissertation could not be completed if I have not received the help and encouragement from numerous people. Firstly, I am greatly indebted to my first supervisor, Prof. Dr. Dr. h.c. Rüdiger Pohl, who kept an eye on the progress of my work and was always available when I needed his advices. His great advices, supports, criticisms, comments, and encouragement helped me to develop necessary knowledge to understand and to build theoretical context in this dissertation. I also would like to express my deep gratitude to Prof. Dr. Martin Klein, my second supervisor, for his suggestions and concerns with my dissertation. I gratefully acknowledge the financial support of DAAD, without which this dissertation would not have been...
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... Classroom Performance System The political, economic and legal systems of a country are called a) Political systems b) Economic systems c) Legal systems d) Political economy 2-5 Collectivism and Individualism Collectivism refers to a system that stresses the primacy of collective goals over individual goals Collectivism can be traced to the ancient Greek philosopher Plato Today, socialists support collectivism When collectivism is emphasized, the needs of the society as whole are generally viewed as being more important than individual freedoms 2-6 Collectivism and Individualism Socialism Modern socialists trace their roots to Karl Marx who advocated state ownership of the basic means of production, distribution, and exchange The state then manages the enterprises for the benefit of society as whole 2-7 Collectivism and Individualism In the early 20th century, socialism split into communists and social democrats Communists generally believed that collectivism could only be achieved though revolution and totalitarian dictatorship,...
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... TABLE OF CONTENTS Chapter 1. Globalization and the Multinational Firm Suggested Answers to End-of-Chapter Questions 3 2. International Monetary System Suggested Answers and Solutions to End-of-Chapter Questions and Problems 12 3. Balance of Payments Suggested Answers and Solutions to End-of-Chapter Questions and Problems 17 4. The Market for Foreign Exchange Suggested Answers and Solutions to End-of-Chapter Questions and Problems 23 5. International Parity Relationships Suggested Answers and Solutions to End-of-Chapter Questions and Problems 33 6. International Banking Suggested Answers and Solutions to End-of-Chapter Questions and Problems 40 7. International Bond Markets Suggested Answers and Solutions to End-of-Chapter Questions and Problems 50 8. International Equity Markets Suggested Answers and Solutions to End-of-Chapter Questions and Problems 56 9. Futures and Options on Foreign Exchange Suggested Answers and Solutions to End-of-Chapter Questions and Problems 62 10. Currency and Interest Rate Swaps Suggested Answers and Solutions to End-of-Chapter Questions and Problems 70 11. International Portfolio Investments Suggested Answers and Solutions to End-of-Chapter Questions and Problems 78 12. Management of Economic Exposure Suggested Answers and Solutions to End-of-Chapter Questions and Problems 87 13. Management of Transaction Exposure Suggested Answers and Solutions to End-of-Chapter...
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...8. Mundell-Fleming Model with a Floating Exchange Rate (No handout; chapter 13) What is the Mundell-Fleming model? In an open economy with external trade and financial transactions, how are the key macrovariables (GDP, inflation, balance of payments, exchange rates, interest rates, etc) determined and interact with each other? What are the effects of fiscal and monetary policies? The Mundell-Fleming model is the standard open macroeconomic model that tries to answer these questions. Most open macro economy models in the textbooks are variations of the Mundell-Fleming model. Theoretically, it is the most popular model. But its applicability to actual policy making is not as high as we would hope (especially for developing and transition countries). Blind application of this model to your country may not yield good results, because the model is based on many assumptions which may be unrealistic. But this is the best model that economists have. So use it carefully. In 1963 when he was young, Prof. Robert Mundell was working with Marcus Fleming at the IMF and wrote a paper which gave birth to this model. He has been at Columbia University (New York) in the last 25 years. He has been a strong advocate of stabilization of major currencies and establishment of euro. In 1999, he won the Nobel Prize in economics, partly because of the Mundell-Fleming model. The Mundell-Fleming model is an open macro application of the standard IS-LM analysis. More precisely, it is an IS-LM analysis...
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...Studi Politici e Internazionali ‘International Economic and Trade Relations’ LM–62 MASTER THESIS in DEVELPOMENT ECONOMICS Foreign Exchange regimes and major currencies Supervisor Student Prof. Paolo Sospiro Parapatakam Praveen Reddy MAT: 62282 ACADEMIC YEAR 2013/2014 Contents Introduction 5 Chapter 1 7 1. History of exchange rate regimes: 7 1.1 Gold Standard System (1880-1914): 7 1.2 Interim instability (1914-1944): 7 1.3 Bretton woods system (1946-1971). 8 Figure1.World Trade (1929-33).............................................................................................9 1.4 Par Value system: 9 2. Classification of Exchange Rate Regimes: 10 2.1 De facto Classification (1998-2009) 11 Diagram1. De Facto Classification of Foreign Exchange Regimes (Nov 1998 – Jan 2009).......12 2.2 Revised De Facto Classification System (2009 January to Present): 15 Table1. Shares of Classifications Using the 1998 and 2009 Systems. 16 2.3 Revised Classification System Definitions: 17 Hard pegs: 17 Soft pegs: 18 Floating arrangements: 19 Residual: 20 2.4 De facto Classification of Exchange Rate Arrangements and Monetary Policy Frameworks-2014 20 Table2. Monetary Policy Frame work .............................................
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...company located in their home country but with subsidiaries in foreign markets. In most cases, FDIs are operated through joint ventures, franchises or mergers where the parent company of the MNC acquires other businesses in overseas markets (Chaurasia, 2008). The objective of this assignment, therefore, is to discuss and explain further the operations of MNCs and issues surrounding these corporations. Hedging Transaction Exposure Four of the Hedging Techniques Available To MNCs Hedging simply means minimizing or mitigating the effect of the exchange rate exposure. This risk is of three types namely, translation exposure, economic exposure and transaction exposure (Luo, 2001). A transaction exposure is a form of foreign exchange risk which results to loss or gains when operations are carried out or denominated in foreign currency (Hill, 2005). It is a short-term exposure that arises as a result of fluctuations in exchange rates. To mitigate or hedge the effects of this risk, an MNC can use any of the following four techniques. When selecting the method to apply, MNCs compare the expected cash flow from each one of these. A).Futures Hedge- to lock in the future exchange rate, a futures hedge uses currency futures. For smaller amounts of money, standardized futures...
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...The Relationship between Interest Rate and Exchange Rate in India Pradyumna Dash[1] Introduction The theoretical as well as empirical relationship between the interest rate and exchange rate has been a debatable issue among the economists. According to Mundell-Fleming model, an increase in interest rate is necessary to stabilize the exchange rate depreciation and to curb the inflationary pressure and thereby helps to avoid many adverse economic consequences. The high interest rate policy is considered important for several reasons. Firstly, it provides the information to the market about the authorities’ resolve not to allow the sharp exchange rate movement that the market expects given the state of the economy and thereby reduce the inflationary expectations and prevent the vicious cycle of inflation and exchange rate depreciation. Secondly, it raises the attractiveness of domestic financial assets as a result of which capital inflow takes place and thereby limiting the exchange rate depreciation. Thirdly, it not only reduces the level of domestic aggregate demand but also improves the balance of payment position by reducing the level of imports. But the East Asian currency crisis and the failure of high interest rates policy to stabilize the exchange rate at its desirable level during 1997-1998 have challenged the credibility of raising interest rates to defend the exchange rate. Critics argue that the high interest rates imperil the ability of the domestic firms...
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...Milevsky, Peng Chen, CFA, Kevin X. Zhu (The Research Foundation of CFA Institute, 2007). LOS: 2012-III-2-10-a, j, k, l “Managing Individual Investor Portfolios” The candidate should be able to: a) discuss how source of wealth, measure of wealth, and stage of life affect an individual investor’s risk tolerance; b) explain the role of situational and psychological profiling in understanding an individual investor; c) compare the traditional finance and behavioral finance models of investor decision making; d) explain the influence of investor psychology on risk tolerance and investment choices; e) explain the use of a personality typing questionnaire for identifying an investor’s personality type; f) compare risk attitudes and decision-making styles among distinct investor personality types, including cautious, methodical, spontaneous, and individualistic investors; g) explain the potential benefits, for both clients and investment advisers, of having a formal investment policy statement; h) explain the process involved in creating an investment policy statement; i) distinguish between required return and desired return and explain the impact these have on the individual investor’s investment policy; j) explain how to set risk and return objectives for individual investor portfolios and discuss the impact that ability and willingness to take risk have on risk...
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...Seppo Honkapohja The 1980s financial liberalization in the Nordic countries Bank of Finland Research Discussion Papers 36 • 2012 Electronic copy available at: http://ssrn.com/abstract=2190375 The 1980s financial liberalization in the Nordic countries1 Bank of Finland Research Discussion Papers 36/2012 Seppo Honkapohja Monetary Policy and Research Department Abstract The financial liberalization in the four Nordic countries (Denmark, Finland, Norway, and Sweden) that took place mostly in the 1980s led to a major financial crisis in three of those countries. The crises in Finland, Norway, and Sweden are among the deepest financial crises in advanced market economies since World War II. Denmark experienced some banking problems but managed to avoid a systemic crisis. This paper reviews the process of liberalization and discusses the reasons why Finland, Norway, and Sweden drifted into financial and economic crises. Keywords: financial repression, credit rationing, capital account controls, financial deregulation JEL classification numbers: E42, F36, G28 I am grateful to Tapio Korhonen for extensive assistance. Adam Gulan, Hanna Putkuri, and Juhana Hukkinen helped in specific aspects of work. Jarmo Kontulainen and Juha Tarkka provided useful comments. The views expressed are my own and do not necessarily represent those of the Bank of Finland. 1 Electronic copy available at: http://ssrn.com/abstract=2190375 I Introduction The banking and economic...
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