Download U1S09_Su10_Lesson_04 - U1S09-2010

Business English Upper Intermediate
U1S09
John Silberstein
[email protected]
Agenda
•International Marketing: Exchange Rates
International Marketing
Exchange Rates
What do we mean when we speak of
exchange rates?
The value of one currency in terms of
another currency.
The U.S. $ is valued (as of 4pm
Monday) at $1 = .8175 €.
International Marketing
Exchange Rates
$1 = .8175 €
1 € = .8302 £
$1 = .6787 £
International Marketing
Exchange Rates
Why are foreign exchange rates so
important?
Simple answer: Any company doing
business in a foreign market needs to
understand the foreign exchange rate
risk.
International Marketing
Exchange Rates
What is the risk in foreign exchange?
Exchange rates are remarkably fluid and
change not just day-to-day, but minute to
minute. A company doing business abroad
has to be able to assess the strength or
weakness of the foreign exchange rates
between their local currency and the currency
of the foreign market(s).
International Marketing
Exchange Rates
Small companies who are within the
first three levels of selling abroad
(Domestic, Intermittent and Export)
may avoid exchange rate volatility by
simply requiring payment in their own
local currency.
International Marketing
Exchange Rates
Volatility:
characterized by or subject to rapid or
unexpected change <a volatile market>
International Marketing
Exchange Rates
Companies from countries with weak
currencies may also request payment
in the customer’s currency (if it is a
strong currency). In fact, the national
government (Gov’t) may support this by
setting up foreign currency banks.
International Marketing
Exchange Rates
Why would a company or country want
to do this?
Buying power
Store of value
International Marketing
Exchange Rates
Every company that is in the top three levels of
International Marketing (International, Multinational
and Global) face substantial risk due to exchange
rate fluctuations.
What are some ways that companies can mitigate
exchange rate risks?
Mitigate:
1 to cause to become less harsh or hostile
2 to make less severe or painful
International Marketing
Exchange Rates
What are some ways that companies
can mitigate exchange rate risks?
Spot Transaction
Forward Contracts
Currency Futures
International Marketing
Exchange Rates
Spot Transaction
A foreign exchange transaction in which
each party promises to pay a certain
amount of currency to the other on the
same day or within one or two days.
International Marketing
Exchange Rates
Spot Transaction
What is the risk inherent in a spot
transaction?
Inherent:
essential character of
something : belonging by nature or habit
International Marketing
Exchange Rates
Forward Contract
In finance, a forward contract or simply a forward is
a non-standardized contract between two parties to
buy or sell an asset at a specified future time at a
price agreed today. The party agreeing to buy the
underlying asset in the future assumes a long
position, and the party agreeing to sell the asset in
the future assumes a short position. The price
agreed upon is called the delivery price, which is
equal to the forward price at the time the contract is
entered into.
International Marketing
Exchange Rates
Forward Contract
What is the risk inherent in a forward
contract?
International Marketing
Exchange Rates
Currency Futures
buying/selling currency in the future at
a specified value and date.
International Marketing
Exchange Rates
Square or Squaring
Utilitizing Currency Futures to mitigate
the risk in a Forward Contract.
International Marketing
Exchange Rates
Currency Futures
With a futures contract, you are obligated to purchase a
certain value of a currency at a certain rate.
Example:
You agreed to purchase Euros 100 with US Dollars last
year. Last year the €-$ exchange rate was approximately
$1.50 for 1€. That means that you would expect to pay
$150. If payment were required today, the rate is
$1.2284. You would pay approximately $123. This is
not a huge difference.
International Marketing
Exchange Rates
Example
In 2005 General Electric (GE) contracts to build a
nuclear power plant in France, the facility will take
10 years to build. The contract stipulates payment
at fixed intervals in Euros every year (on July 1).
The total value of the contract is 100,000,000 €
and the yearly payment would be 10,000,000 €.
On June 20th 2005 the exchange rate was $1.20
per Euro and the total value of the contract would
be $120,000,000,000.
International Marketing
Exchange Rates
EUR 10,000,000.00
EUR 100,000,000.00
$1.1936
$1.2814
$1.3622
$1.5699
$1.4021
$1.2285
$11,936,000.00
$12,814,000.00
$13,622,000.00
$15,699,000.00
$14,021,000.00
$12,285,000.00
$80,377,000.00
7/1/2005
7/1/2006
7/1/2007
7/1/2008
7/1/2009
7/1/2010
Total Paid to date
The Gov’t of France is paying in Euros, their local currency. General Electric is receiving
Euros, not their local currency. As the $ weakens, General Electric profits, relative to the
US Dollar, increase.
GE is also concerned about purchases of raw materials in Europe, concrete, steel, etc.
and will pay for these in Euros.
As the value of the Euro weakened, General Electric may have decided to purchase
Currency Futures to square its position.
International Marketing
Exchange Rates
Example
Coca-Cola Corp. generates a stream of
revenue in almost every world currency.
Coca-Cola has to decide how to
repatriate foreign income to the US.
International Marketing
Other Macro Economic Terms to know!
Inflation: a continuing rise in the general price level
usually attributed to an increase in the volume of
money and credit relative to available goods and
services.
Recession: a period of reduced economic activity
and is usually accompanied by a reduction in some
prices as demand drops.
During the most recent recession, the pricing of
housing and crude oil dropped worldwide due to a
large decrease in demand.
International Marketing
Other Macro Economic Terms to know!
Gold Standard:
The gold standard is a monetary system in
which the standard economic unit of
account is a fixed weight of gold.
Historically, money was in the form of
precious metals, usually Gold and/or silver.
International Marketing
Other Macro Economic Terms to know!
German Hyperinflation of 1923
Hyperinflation: hyperinflation is inflation that is
very high or "out of control", a condition in
which prices increase rapidly as
a currency loses its value.
The main cause of hyperinflation is a massive
and rapid increase in the amount of money
that is not supported by a corresponding
growth in the output of goods and services.
International Marketing
Writing about the trends displayed in the graph of the
value of the USD vs. the Euro