...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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...Assignment 1 FNCE 4467 What exchange rate regime do you think the Bank of China followed until July, 2005? Justify your opinion. The monetary policy framework of China was the monetary aggregate target in which the exchange rate arrangement was the Crawl-like arrangement. The de facto monetary policy framework was an exchange rate anchored to the dollar (Brean, Eun, Resnick, 2014). As shown in figure 1 during 2003 to mid-2005 the Chinese Yuan exchange rate was fixed with the USD at around 8.28 Yuan/Dollar. The Chinese fixed exchange rate against the U.S dollar was already set more than a decade ago. Furthermore, by having a fixed rate, the Peoples’ Bank of China (PBOC) made China able to maintain its goods at a lower price compared to the rest of the world, which help them reach a faster economic growth and great foreign excess reserves (China Fixes Value of Yuan, 2003). Figure 1 Figure 2 What regime do you believe the Bank of China was following from July, 2005 to July, 2008? Justify your opinion. The Bank of China followed the float rate regime from 2005 to 2008. In which the exchange rate is tied to a basket of currencies in which U.S dollar, euro, yen, and Korean won were the main ones. The regime allowed movement up to +/- 0/5% (Frankel, 2009). as seen in figure 3, the floating regime created volatility in the Yuan as seen in the upward trend of the daily exchange rate USD/RMB compared to figure 1 between 2003-05. Figure 3 ...
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...that the exchange rate is set and artificially maintained by the government. The rate will not fluctuate from day to day. The pegged exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to which makes trade and investments between the two currency areas easier and more predictable. Pegged exchange rate system can also be used as a means to control inflation. The difference between a free/clean float, a managed float and fixed exchange rate systems of exchange rate is that: Clean/free float In the clean/free float also known as a pure exchange rate the value of a currency, which is the exchange rate is determined purely by market forces of supply and demand. Clean floats can only exist where there is no government interference, as would be the case in a purely capitalistic economy. Therefore, clean floats are a result of Laissez-Faire or free market economies. Managed float In a managed float also known as “dirty float” the government or the country's central bank occasionally intervenes to change the direction of the value of the country's currency. In most instances, the intervention aspect of a dirty float system is meant to act as a buffer against an external economic shock before its effects become truly disruptive to the domestic economy. Therefore, with a managed or dirty float the government doesn’t peg the currency, but tries from time to time to influence the rate by buying or selling in the currency markets. Fixed exchange...
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...International Financial Management EF 5143 Dr. Du Du Student Name and SID: Li Xing, 53680125 Lin Lin, 53834131 Chen Shu, 53684900 Zhang Rui, 95651546 Abstract The dollar- linked exchange rate system in HK was put into operation in 1983 and was always regarded as the footstone of stabilizing HK economy since then. However, 30 years later, great changes both inside and outside have taken place in Hong Kong. Now, a series of economic and social problems associated emerge with the Hong Kong's present exchange rate arrangement- linking HKD to USD. Is the dollar-linked exchange rate system still suitable for HK? Will the Hong Kong monetary authority have other better choices? In order to resolve the above questions, our report was divided into four main parts to analyze and discuss this issue. First, we discussed the reasons for choosing dollar- linked and also the disadvantages of linking HKD to USD that we assessed both in theory and fact. Then, we focused on the potential benefits of HKD linked with CNY before we analyzed the disadvantages. Later, we talked about a larger issue – dollarization and compared HK with Switzerland and Singapore before we came to our conclusions that HK should give up existed linking exchange rate system and adopt managed floating arrangement. Keywords: Linked exchange rate system, Hong Kong dollar, United State dollar, Chinese Yuan, Dollarization 1 Contents 1. 2. Background......................................................................
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...Profitability: In order for a corporation to be successful, the company must follow the strategies, and the value creation steps in order to reach a rate of return that the company makes on the investment. This is found by dividing net profits by total invested capital. Profit Growth Value Creation: This is usually measured by finding the difference between value and cost. A company can create value in a product or service by either lowering production costs, or by making the product or service more attractive to consumers. A company can make the product look more attractive by changing the design or supplier with whom they conduct business. By doing this, consumers may view the product as being worth more, therefore they are willing to pay more for that product or service. This is known as the differentiation strategy. Value Chain: The value chain is known as the process of activities that include marketing, research and development, human resources and much more to make up the overall operations of the organization. Pegged Exchange Rate Dirty Float: This refers to the currency in a given country, being determined by the market. It is a dirty float, because the government will step in and try to maintain the value of the currency if it is decreasing at an abnormal rate. Currently the Chinese are practicing this with their currency. Fixed Exchange...
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...Part A: A couple is comparing two daycares to determine the best option for their 1 year old son. A home-based daycare charges a flat rate of $5 per hour. A center-based daycare charges a fixed rate of $185 per week, providing 40 hours of childcare. Above 40 hours, the center-based daycare then charges a fixed rate of $8 per hour. The couple determines that the driving distance to each daycare is the same, thus driving expenses do not need to be considered. The couple will require 50 hours of childcare per week and are looking for the cheapest daycare, as they are soon expecting their second child. Part B: 1. “y” represents total cost per week in dollars “x” represents hours Home based daycare: y=5x Center based daycare: y=185+8(x-40), x≥40 hours 2. For the home based daycare, they charge a flat rate of $5 per hour. Thus the couple can calculate their cost by multiplying $5 by the number of hours they need for childcare each week. For the center based daycare, the couple can calculate their weekly cost by adding the $185 fixed rate to the cost of any additional hours needed after 40. Thus, if they are going over 40 hours, they would subtract 40 hours from the total number of hours needed and multiply that by the $8 the center charges for each additional hour. 3. y=5x y=185+8(x-40) y=185+8(x-40) 5x=185+8x-320 5x=-135+8x 5x-8x=-135+8x-8x -3x=-135 -3 -3 x=45 y=5x y=5(45) y=225 Thus, both the center based and the home based...
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...and 1 played the role of builders. The division of teams was done as follows: Team Type | Teams | No. of Players | Builders | 5 | 4 | Cement Suppliers | 3 | 2 | Sand Suppliers | 3 | 2 | Stone Suppliers | 3 | 2 | Steel Suppliers | 3 | 2 | The game has 5 rounds. In each round, builders have to build a specific building allocated to them. To build any of the buildings, they have to buy adequate amount of cement, stone, steel and sand from the suppliers. They will be provided with fixed initial amount of cash. Builders can approach bank to get additional cash at a fixed rate of 10% which will be applicable for that round only, carrying forward loan for each extra round will attract an additional 5% rate per round. In case the builders are not able to get a deal from the suppliers in the stipulated time, they need to purchase the required materials by the bank at a fixed rate which might be higher as compared to the market prices. The suppliers will be provided with fixed inventory at the beginning of the game. The Cost Price of the materials will be disclosed only to the suppliers. The suppliers can fix their Selling Price according to the changing demand. In...
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...1.1 Introduction: Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another currency or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country it also called rate of exchange or foreign exchange rate or currency exchange rate. 1.2 Objective of the Report: The primary objective of this report is to know the over functions of government in foreign exchange market. But the objective behind this study is something broader. Objectives of the study are summarized in the following manner: • To describe the exchange rate systems used by various government. • To explain how government can use direct and indirect intervention influence exchange rates. • To study existing government control over exchange rate system. • To know how government can affect economic conditions. • To have some theoretical exposures that will be helpful for our future career. 1.3 Methodology: For preparing this report, we have undergone group discussion, collected data from internet. We also studied different circulars and reference books on this topic. We hope these criteria will be enough to find out different picture of government influence on exchange rate system. 1.4 Limitations of the Study: 1. The time, 1(One) week...
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...Problem set 1 (*optional items) Questions and problems on global firms and governance, international monetary systems, forex markets, and parities. Global firms and governance: 1. How would you define and measure multinational corporations? A firm is called a MNC if it has controlling real assets or operating facilities in multiple countries. Operationally, it can be measured by the extent of “foreign content,” proxied by foreign sales ratios, foreign asset ratios, and foreign employee ratios, or their averages, augmented by the number of countries in which the firm has operations. 2. Define greenfield investment versus foreign direct investment. FDI involves corporate investments in real assets located aboard and includes both greenfield investment and international mergers and acquisitions. The greenfield investment involves construction of plants and equipment or R&D facilities from the scratch. 3. ESM13, chapter 2, question 8. Labor Unions. In Germany and Scandinavia, among others, labor unions have representation on boards of directors or supervisory boards. How might such union representation be viewed under the shareholder wealth maximization model compared to the corporate wealth maximization model? Labor union representation that may be required by statute is an example of governmental direction toward the corporate stakeholder model (or corporate wealth maximization model), in that such a requirement is...
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...Foreign Exchange Market as well as the Net International Reserves, their stabilizing methods and strategies, along with a discussion on the analysis and effects of the measures taken to attain success within the Jamaican economy. The foreign exchange market is defined as (main function) a market used for converting from one country’s currency to another using an exchange rate which determines the value of one country’s currency against another. The Jamaican foreign exchange market came to full liberalization in the 1990’s. Since then there has been much discussion on the efficiency of the market and the appropriateness of the foreign exchange rate. “The use of market microstructure models has become very popular in financial market research stemming from the inability of traditional macroeconomic models to adequately capture the short-term dynamics of financial markets” (Frankel and Froot, 1990).There have been concerns as to whether the foreign exchange rate correctly reflects the forces of supply and demand in the market. The role of the Bank of Jamaica when it pertains to foreign exchange market is market intervention, market surveillance and data collection and information dissemination; with particular attention paid to intervention. The secondary function of the foreign exchange market is to provide insurance against foreign exchange risk. Foreign exchange risk can be defined as any adverse consequence or unpredictable change that may occur to the exchange rate. ...
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...Chapter 1 Current Mutinational Challenges and the Global Economy The Global Financial Marketplace Assets(government debt securities), institutions(central banks, commercial/investment bank), linkages(interbanks) Eurocurrency markets serve two valuable purposes:Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity, The Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs (including export and import financing) What Is Different About International Financial Management Market Imperfections: A Rationale for the Existence of the Multinational Firm MNE motives: Market seekers, Raw material seekers, Production efficiency seekers, Knowledge seekers, Political safety seekers Globalization process -Stage I: early domestic phase growing into the international trade phase, Stage II: A successful firm will continue to grow from simple international trade to the multinational phase characterized by production and investment both at home and abroad Twin agency: Chapter 2 Corporate Ownership, Goals, and Governance Who Owns the Business The Goal of Management two models: 1.shareholder wealth maximization(max return&min risk): market efficient&risk exsit, unsystematic risk can be diversified, systematic risk can be eliminated. Replace, take-over, vote/share 2.stakeholder capitalism model(labor...
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...EVOLUTION OF EXCHANGE RATE REGIME: IMPACT ON MACRO ECONOMY OF BANGLADESH by Liza Fahmida A project submitted in partial fulfillment of the requirements for the degree of Professional Master in Banking and Finance Examination Committee: Dr. Sundar Venkatesh (Chairperson) Dr. Juthathip Jongwanich Dr. Yuosre Badir Nationality: Bangladeshi Previous Degree: Master in Finance and Banking University of Dhaka Bangladesh Scholarship Donor: Bangladesh Bank Asian Institute of Technology School of Management Thailand May 2012 i ACKNOWLEDGEMENT The dissertation paper entitled “Evolution Of Exchange Rate Regime: Impact On Macro Economy Of Bangladesh” has been prepared for the partial fulfillment of Professional master in Banking and Finance (PMBF) program conducted by School of Management, AIT, Thailand. I would like to offer my wholehearted gratitude and respect to a good number of people who offered encouragement, data and information, inspiration and assistance during the course of constructing this dissertation paper. It would be difficult to prepare the paper and to present it in a lucid manner within stipulated time without the help of my guide teacher Dr. Sundar Venkatesh, Adjunct Faculty, School of Management, Asian Institute of Technology, Thailand. His utmost care, constant support and meticulous supervision guided me through the process. I am indebted to Begum Sultana Razia, General Manager, Monetary Policy Department, Bangladesh Bank, whose sincere co-operation...
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...Classnote Prof. Gordon Bodnar Techniques for Managing Exchange Rate Exposure A firm's economic exposure to the exchange rate is the impact on net cash flow effects of a change in the exchange rate. It consists of the combination of transaction exposure and operating exposure. Having determined whether the firm should hedge its exposure, this note will discuss the various things that a firm can do to reduce its economic exposure. Our discussion will consider two different approaches to handling these exposures: real operating hedges and financial hedges. Transaction Exposure Financial Techniques of Managing Transaction Exposure Transaction exposure hedging should have been discussed in some detail in the previous international finance course; however, we will briefly go over the standard financial methods available for hedging this exposure. The main distinction between transaction exposure and operating exposure is the ease with which one can identify the size of a transaction exposure. This, combined with the fact that it has a well-defined time interval associated with it makes it extremely suitable for hedging with financial instruments. Among the more standard methods for hedging transaction exposure are: i) Forward Contracts - When a firm has an agreement to pay (receive) a fixed amount of foreign currency at some date in the future, in most currencies it can obtain a contract today that specifies a price at which it can buy (sell) the foreign currency at the specified...
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...Answer: Foreign Direct Investment: FDI occurs when a frim invest directly in facilities to produce or market product in a foreign country. The Theories of FDI: Theroies of FDI may be classified under the following------ 1. Production or product Cycle Theory of Vernon 2. The theory of Exchange Rate on Imperfect Capital Market 3. The Internalisation Theory 4. The Eclectic Paradigm of Dunning Production or product Cycle Theory of Vernon Production or product theory developed by Vernob in 1966 was used to explain certain types of FDI. He believes that there are four stage of production cycle— * Innivation * Growth * Maturity * Decline. Vernon’s production life-cycle suggest that frims undertake FDI at particular stage in the life cycle of products they have developed or produced. However, Vernon’s theory does not adresss the issue of whether FDI is more efficient than exporting or licensing for expanding abroad. The theory of Exchange Rate on Imperfect Capital Market: This is another theory which tried to explain FDI. Initially the foreign exchange risk has been analyzed from the perspective of international trade. However, currency risk rate theory cannot explain simultaneous foreign direct investment between countries with different currencies. The sustainers argue that such investments are made in different times, but there are enough cases that contradict these claims. The Internalisation Theory This theory tries to explain the...
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...various exchange rate systems. DEFINITION OF EXCHANGE RATE Exchange rate is defined as the rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates,inflation, and the state of politics and the economy in each country, also called rate of exchange or foreign exchange rate or currency exchange rate. (1). FLOATING EXCHANGE RATE SYSTEM In a floating exchange rate system, governments and central banks do not participate in the market for foreign exchange. The relationship between governments and central banks on the one hand and currency markets on the other is much the same as the typical relationship between these institutions and stock markets. Governments may regulate stock markets to prevent fraud, but stock values themselves are left to float in the market. The U.S. government, for example, does not intervene in the stock market to influence stock prices. The concept of a completely free-floating exchange rate system is a theoretical one. In practice, all governments or central banks intervene in currency markets in an effort to influence exchange rates. Some countries, such as the United States, intervene to only a small degree, so that the notion of a free-floating exchange rate...
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