The Foreign Exchange Market
Chapter Outline
Opening Ca: Hyundai and Kia Face a Strong Won
INTRODUCTION
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THE FUNCTIONS OF THE FOREIGN EXCHANGE MARKET
Currency Conversion
Insuring Against Foreign Exchange Risk
Management Focus: Volkswagen’s Hedging Strategy
THE NATURE OF THE FOREIGN EXCHANGE MARKET
ECONOMIC THEORIES OF EXCHANGE RATE DETERMINATION
Prices and Exchange Rates
Interest Rates and Exchange Rates
Investor Psychology and Bandwagon Effects
Country Focus: Anatomy of a Currency Crisis
Summary
EXCHANGE RATE FORECASTING
The Efficient Market School
The Inefficient Market School
Approaches to Forecasting
CURRENCY CONVERTIBILITY
FOCUS ON MANAGERIAL IMPLICATIONS
Transaction Exposure
Translation Exposure
Economic Exposure百潭谷
Reducing Translation and Transaction Exposure
Reducing Economic Exposure
Management Focus: Dealing with the Rising Euro
Other Steps for Managing Foreign Exchange Risk
计算机科学技术
SUMMARY
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: The Cur of the Strong Dollar at ST Micro
Learning Objectives
1. Be conversant with the functions of the foreign exchange market.
2. Understand what is meant by spot exchange rates.
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风水罗盘全解3. Appreciate the role that forward exchange rates play in insuring against foreign exchange risk.
4. Understand the different theories explaining how currency exchange rates are determined and their relative merits.
5. Be familiar with the merits of different approaches toward exchange rate forecasting.
百变小樱台词6. Understand the differences between translation, transaction and economic exposure, and what managers can do to manage each type of exposure.
Chapter Summary
This chapter focus on the foreign exchange market. At the outt, the chapter explains how the foreign exchange market works. Included in this discussion is an explanation of the difference between spot exchange rates and forward exchange rates. The nature of the foreign exchange market is discusd, including an examination of the forces that determine exchange rates. In addition, the author provides a discussion of the degree to which it is possible to predict exchange rate movements. Other topics discusd in the chapter include exchange rate forecasting, currency convertibility, and the implications of exchange rate movements on business. Finally, the chapter concludes with a discussion of the implications of exchange rates for business. For instance, it is absolutely critical that international business understand the influence of exchange rates on the profitability of trade and investment deals. Adver changes in exchange rates can make apparently profitable deals unprofitable.成都大熊猫
Opening Ca: Hyundai and Kia Face a Strong Won
Summary电影两只老虎
The opening ca explores the effect of changing exchange rates on the profits of two Korean automakers, Hyundai and Kia. Both companies are trying to expand their prence in the United States using a low cost pricing strategy. In doing so, the South Korean automakers reduce their margin per car, and so, are even more affected than other automakers by a weak dollar. To minimize the effects of a weak dollar, Hyundai and its affiliate Kia have both recently changed their strategy to include production in the United States. Discussion of the ca can revolve around the following questions:
Suggested Discussion Questions
QUESTION 1: How do Hyundai and Kia u exchange rates in their daily activities? How did the weak dollar affect the profits of the two companies between 2005 and 2007?
ANSWER: Hyundai and Kia are both South Korean companies that rely on the U.S. market for a significant share of their revenues. Each time the companies ll vehicles in the United States for dollars, the dollars must be converted to the South Korean currency, the won. In 2005, one U.S. dollar bought 1,050 won. By late 2007, the exchange rate ha
d changed and one U.S. dollar bought just 918 won. The falling dollar meant lower profits for the two exporters.
QUESTION 2: How can Hyundai and Kia limit the negative effects of exchange rates? Should the two companies continue to move away from exporting toward more production in the United States? Why or why not?
ANSWER: Hyundai and Kia were particularly vulnerable to the weak U.S. dollar becau of their reliance on exports. Production of the companies’ vehicles took place in South Korea, the cars were shipped to the United States, sold in U.S. dollars which were then converted back to won. In 2007, the won reached a 10 year high against the U.S. dollar. Even though unit sales were rising for the companies, their profits actually fell. By shifting some production to the United States, the two companies can limit their exposure to the weak dollar.