Download Module 5

CURRENCIES AND FINANCE
Dr Alan Fyall – Module 5
Content
Global Financial Crisis
Budgeting
Inflation
Currency Strategies
Issues of Taxation
Language of Foreign Exchange
Global Financial Crisis: Causes
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Bursting of US housing bubble
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Home ownership / house prices
(124% growth between 1997 and
2006)
National median home price 2.9-3.1
(2001) – 4.6 in 2006 (UK nearly 7)
Easy (too easy) access to loans for
sub-prime borrowers (higher credit
risk)
Overvaluation of sub-prime
mortgages (assumption that house
prices will continue to grow)
Lack of banking capital to support
financial commitments
Complexity of financial system
Global Financial Crisis: Impact
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Collapse of large financial institutions
(+ confidence in them)
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Bank bailouts by national governments
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Plummeting stock markets
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House market collapse
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Decline in consumer wealth and
confidence
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World economic recession 2008-12
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European sovereign debt crisis
Global Financial Crisis: Global Effects
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Global economic collapse
European sovereign-debt crisis
(i.e. need for a third-party
bailout)
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Negative perceptions on EU and
Eurozone
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Unsustainable public sector
spending (wages and pensions)
EU monetary union without fiscal
union
Greece, Ireland and Portugal
(6% of EU GDP)
Interconnectivity of global
financial system
Global Financial Crisis: Solutions
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Reinvest?
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Financial stimulus?
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Austerity?
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Increased or lower levels of
taxation?
Higher pension contributions
and longer working / later
retirement age?
WHAT IS THE IMPACT OF THE
GLOBAL FINANCIAL CRISIS ON
THE ORGANIZATION OF
INTERNATIONAL EVENTS IN
YOUR CHOSEN COUNTRY?
Discuss in Groups for 5-10 Minutes
CHINESE SPEND ON INFRASTRUCTURE –
9% OF GDP
US SPEND ON INFRASTRUCTURE – 2.4%
Budgeting
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Air travel costs
Costs of communication
Longer and increased number of site visits
Shipping costs
Customs and duty payments
Interpretation and translation costs
Taxes
Contingency funding
Broader and more local economic conditions
Currency fluctuations and general volatility
Inflation
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Rise in the general level of prices of goods and services
in an economy over a period of time
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Increase in the rate of inflation reflects an erosion in the
purchasing power of money
Increase in the opportunity cost of holding money
 Uncertainty over future inflation
 Discourages investment and savings
 In extreme cases leads to hoarding of goods
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Inflation influenced by:
Fluctuations in demand/supply for goods and services
 Weather and extreme conditions
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Currency Strategies
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Much depends on availability of funds
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Options Contract:
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Forward Contract:
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Agreement to purchase a stipulated amount of currency on a specified
future date. Really serves as an insurance policy.
Layering:
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Option to purchase foreign currency at a predetermined price during a
specified period as a hedge against currency fluctuations. No obligation
to accept on specified date but a fee incurred.
Purchase currency at intervals when exchange rates are favourable.
Spot Pricing:
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Current trading price of a currency.
Key International Currencies
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Argentinian Peso
Australian Dollar
Brazilian Real
Chinese Yuan
Emirati Dirham
Euro
GBP
Hong Kong Dollar
Indian Rupee
Indonesian Rupiah
Israeli Shekel
Japanese Yen
Russian Ruble
Saudi Riyal
Thai Baht
Turkish Lira
http://www.xe.com/ucc/
http://www.oanda.com/
Purchasing Power Parity
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Theory which states that exchange rates between currencies
are in equilibrium when their purchasing power is the same
in each of the two countries.
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Exchange rate between the two countries should equal the ratio
of the two countries’ price level of a fixed basket of goods.
i.e. GBP £500 = US$ 750
The Economist “Hamburger Index”
http://www.economist.com/blogs/graphicdetail/2012/07/dailychart-17
Planning Guidelines
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Choice of currency for delegate registration critical
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Necessity for a cash fund
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Selection and use of credit cards
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Foreign bank accounts
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Hotel accounts
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Fiduciary use (i.e. PCO, DMO)
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Wire Transfer (Electronic Funds Transfer)
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Bank Draft
Letters of Credit
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Bank guarantee for payment of supplied (imported) goods.
Frequent
request of the overseas supplier that payment for goods are made in advance to protect
them from default on payments:
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Buyer and seller agree terms of trade (date, specification, shipping etc.).
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Buyer applies for L/C from issuing bank.
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Issuing bank sends L/C to supplier’s bank.
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Supplier sends goods to importer.
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Assuming agreed terms are met, issuing bank pays supplier.
Issues of Taxation
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VAT, TVA (France), GST
(Canada) and IVA (Latin
America)
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5-25%
Essential to distinguish
between taxed and nontaxed element of supplies
UK – 60% of pump price
for gas is tax and duty
USA – 13-15% equivalent
Value Added Tax
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What is the level of VAT in the destination country?
Is VAT levied on everything pertaining to the event, or are some
items exempt?
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Can VAT be reclaimed and if so what are the requirements?
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Can VAT be reclaimed by delegates?
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Zero Rate in UK:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuide
ToTax/VAT/DG_190918
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basic food items
books, newspapers and magazines
children's clothes
Language of Foreign Exchange
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Base Currency
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Bid-Offer Spread
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Currency in which the operating results of the bank or institution are reported.
Difference between the buy (bid) and sell (offer) price of a currency or financial
instrument.
Broker
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An agent, who executes orders to buy and sell currencies and related
instruments either for a commission or on a spread. Brokers are agents working
on commission and not principals or agents acting on their own account. In the
foreign exchange market brokers tend to act as intermediaries between banks
bringing buyers and sellers together for a commission paid by the initiator or by
both parties. There are four or five major global brokers operating through
subsidiaries affiliates and partners in many countries.
Language of Foreign Exchange
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Declaration Date
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Economic Exposure
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Reflects the impact of foreign exchange changes on the future competitive
position of a company.
Exposure
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The latest day or time by which the buyer of an option must indicate to the seller
his intention to the option.
The total amount of money loaned to a borrower or country. Banks set rules to
prevent overexposure to any single borrower. In trading operations, it is the
potential for running a profit or loss from fluctuations in market prices.
Devaluation
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Deliberate downward adjustment of a currency against its fixed parities or
bands, normally by formal announcement.
Language of Foreign Exchange
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Foreign Exchange Market
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Market where currencies are traded internationally. About a trillion (million
million) dollars-worth of foreign exchange is traded globally every day, making
forex larger than all bond markets put together. Currency markets exist in the
form of spot, forward, futures and options markets. Foreign exchange
transactions are made up of: Trade flows Only 5% to 10% of total forex
transactions. Imports usually need to be paid for in the currency of the country
from which they originate. Exports are usually paid for in one's own currency. A
trade deficit therefore causes a currency to depreciate. Flow-ons Created when
a large trade is split up into several smaller trades. Capital flows Cross-border
investment. Speculation Short-term investment based on expected currency
movements. This accounts for the lion's share of forex market volume.
Futures
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Exchange-traded contracts. They are firm agreements to deliver (or take
delivery of) a standardized amount of something on a certain date at a
predetermined price
Language of Foreign Exchange
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Gross Domestic Product
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Gross National Product
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Total value of a country's output, income or expenditure produced within the
country's physical borders.
Gross domestic product plus "factor income from abroad" - income earned from
investment or work abroad.
Hard Currency
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A currency whose value is expected to remain stable or increase in terms of
other currencies.
Language of Foreign Exchange
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Hedging
 A strategy used to offset market risk, whereby one position protects another.
Inflation
 Continued rise in the general price level in conjunction with a related drop in
purchasing power. Sometimes referred to as an excessive movement in such price
levels.
Monetarism
 A school of economics which believes that strict control of money supply is the
principal tool for implementing monetary policy, especially against inflation.
Policies include cuts in public spending and high interest rates.
Monetary Easing
 A modest loosening of monetary constraint by changing interest rate, money
supply, deposit ratios.
Language of Foreign Exchange
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Risk
 The degree of uncertainty associated with an investment. The main elements that
contribute to the riskiness of an investment are volatility, liquidity and leverage.
All things being equal, a high degree of volatility and leverage makes an
investment more risky. An illiquid market, where buyers are not always matched
by sellers, also increases risk & investors can be left holding an asset that is
falling in price.
Risk/Return
 The relationship between the risk and return on an investment. Usually, the more
risk you are prepared to take, the higher the return you can expect. Depositing
your money in a bank is safe and therefore a low return is regarded as
sufficient. Investing in stock market exposes you to more risk (from capital losses)
and so investors will expect a higher return.
Questions
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(407) 903 8808
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