Mba 531 week 4 - overview - chap 10 - 12

MBA 531Business in Today’s Global

Environment

Overview of Week 4 Textbook Readings: Chapters 10 - 12

Chapter 10

The Foreign Exchange Market

10-3

Why Is The Foreign Exchange Market Important?

The foreign exchange market 1. is used to convert the currency of one country

into the currency of another2. provides some insurance against foreign

exchange risk - the adverse consequences of unpredictable changes in exchange rates

The exchange rate is the rate at which one currency is converted into another events in the foreign exchange market affect

firm sales, profits, and strategy

10-4

When Do Firms Use The Foreign Exchange Market?

International companies use the foreign exchange market when the payments they receive for exports, the income

they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign currencies

they must pay a foreign company for its products or services in its country’s currency

they have spare cash that they wish to invest for short terms in money markets

they are involved in currency speculation - the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

10-5

How Can Firms Hedge Against Foreign Exchange Risk?

The foreign exchange market provides insurance to protect against foreign exchange risk the possibility that unpredicted changes in

future exchange rates will have adverse consequences for the firm

A firm that insures itself against foreign exchange risk is hedging

10-6

What Is The Difference Between Spot Rates And Forward Rates?

The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day spot rates change continually depending on the

supply and demand for that currency and other currencies

Spot exchange rates can be quoted as the amount of foreign currency one U.S. dollar can buy, or as the value of a dollar for one unit of foreign currency

10-7


Value of the U.S. Dollar Against Other Currencies 2/12/11

10-8


To insure or hedge against a possible adverse foreign exchange rate movement, firms engage in forward exchanges two parties agree to exchange currency and

execute the deal at some specific date in the future

A forward exchange rate is the rate used for these transactions rates for currency exchange are typically

quoted for 30, 90, or 180 days into the future

10-9

What Is A Currency Swap?

A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

Swaps are transacted between international businesses and their banks between banks between governments when it is desirable to move

out of one currency into another for a limited period without incurring foreign exchange rate risk

10-10

What Is The Nature Of The Foreign Exchange Market?

The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems the average total value of global foreign exchange

trading in March, 1986 was just $200 billion, in April, 2010 it hit $4 trillion per day

the most important trading centers are London, New York, Zurich, Tokyo, and Singapore

the market is always open somewhere in the world—it never sleeps

10-11

Do Exchange Rates Differ Between Markets?

High-speed computer linkages between trading centers mean there is no significant difference between exchange rates in the differing trading centers

If exchange rates quoted in different markets were not essentially the same, there would be an opportunity for arbitrage the process of buying a currency low

and selling it high

10-12

Do Exchange Rates Differ Between Markets?

Most transactions involve dollars on one side—it is a vehicle currency 85% of all foreign exchange transactions

involve the U.S. dollar other vehicle currencies are the euro, the

Japanese yen, and the British pound China’s renminbi is still only used for about

0.3% of foreign exchange transactions

10-13

How Are Exchange Rates Determined?

Exchange rates are determined by the demand and supply for different currencies

Three factors impact future exchange rate movements 1. A country’s price inflation

2. A country’s interest rate

3. Market psychology

10-14

How Do Prices Influence Exchange Rates?

The law of one price states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency otherwise there is an opportunity for arbitrage

until prices equalize between the two markets

10-15


Purchasing power parity theory (PPP) argues that given relatively efficient markets (a market with no impediments to the free flow of goods and services) the price of a “basket of goods” should be roughly equivalent in each country predicts that changes in relative prices will

result in a change in exchange rates

10-16


A positive relationship exists between the inflation rate and the level of money supply when the growth in the money supply is greater than

the growth in output, inflation will occur

PPP theory suggests that changes in relative prices between countries will lead to exchange rate changes, at least in the short run a country with high inflation should see its currency

depreciate relative to others

10-17


Question: How well does PPP work? Empirical testing of PPP theory suggests that

it is most accurate in the long run, and for countries with high inflation and underdeveloped capital markets

it is less useful for predicting short term exchange rate movements between the currencies of advanced industrialized nations that have relatively small differentials in inflation rates

10-18

How Do Interest Rates Influence Exchange Rates?

The International Fisher Effect states that for any two countries the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between two countries

In other words: [(S1 - S2) / S2 ] x 100 = i $ - i ¥

where i$ and i¥ are the respective nominal interest rates in two countries (in this case the U.S. and Japan), S1 is the spot exchange rate at the beginning of the period and S2 is the spot exchange rate at the end of the period

10-19

How Does Investor Psychology

Influence Exchange Rates? The bandwagon effect occurs when

expectations on the part of traders turn into self-fulfilling prophecies - traders can join the bandwagon and move exchange rates based on group expectations investor psychology and bandwagon effects

greatly influence short term exchange rate movements

government intervention can prevent the bandwagon from starting, but is not always effective

10-20

Should Companies Use Exchange Rate Forecasting Services?

There are two schools of thought1. The efficient market school - forward exchange

rates do the best possible job of forecasting future spot exchange rates, and, therefore, investing in forecasting services would be a waste of money

2. The inefficient market school - companies can improve the foreign exchange market’s estimate of future exchange rates by investing in forecasting services

10-21


1. An efficient market is one in which prices reflect all available information if the foreign exchange market is efficient,

then forward exchange rates should be unbiased predictors of future spot rates

Most empirical tests confirm the efficient market hypothesis suggesting that companies should not waste their money on forecasting services

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2. An inefficient market is one in which prices do not reflect all available information in an inefficient market, forward exchange

rates will not be the best possible predictors of future spot exchange rates and it may be worthwhile for international businesses to invest in forecasting services

However, the track record of forecasting services is not good

10-23

How Are Exchange Rates Predicted?

Two schools of thought on forecasting:

1. Fundamental analysis draws upon economic factors like interest rates, monetary policy, inflation rates, or balance of payments information to predict exchange rates

2. Technical analysis charts trends with the assumption that past trends and waves are reasonable predictors of future trends and waves

10-24

Are All Currencies Freely Convertible?

A currency is freely convertible when a government of a country allows both residents and non-residents to purchase unlimited amounts of foreign currency with the domestic currency

A currency is externally convertible when non-residents can convert their holdings of domestic currency into a foreign currency, but when the ability of residents to convert currency is limited in some way

A currency is nonconvertible when both residents and non-residents are prohibited from converting their holdings of domestic currency into a foreign currency

10-25


Most countries today practice free convertibility but many countries impose restrictions on the

amount of money that can be converted Countries limit convertibility to preserve foreign

exchange reserves and prevent capital flight when residents and nonresidents rush to

convert their holdings of domestic currency into a foreign currency

most likely to occur in times of hyperinflation or economic crisis

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When a currency is nonconvertible, firms may turn to countertrade barter-like agreements where goods and

services are traded for other goods and services

was more common in the past when more currencies were nonconvertible, but today involves less than 10% of world trade

10-27

What Do Exchange Rates Mean For Managers?

Managers need to consider three types of foreign exchange risk

1. Transaction exposure - the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values includes obligations for the purchase or sale

of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies

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2. Translation exposure - the impact of currency exchange rate changes on the reported financial statements of a company concerned with the present measurement of

past events gains or losses are “paper losses”

they are unrealized

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3. Economic exposure - the extent to which a firm’s future international earning power is affected by changes in exchange rates concerned with the long-term effect of

changes in exchange rates on future prices, sales, and costs

10-30

How Can Managers Minimize Exchange Rate Risk?

To minimize transaction and translation exposure, managers should

1. Buy forward

2. Use swaps

3. Lead and lag payables and receivables lead and lag strategies can be difficult to

implement

10-31

How Can Managers Minimize Exchange Rate Risk? Lead strategy - attempt to collect foreign

currency receivables early when a foreign currency is expected to depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate

Lag strategy - delay collection of foreign currency receivables if that currency is expected to appreciate and delay payables if the currency is expected to depreciate

10-32

How Can Managers Minimize Exchange Rate Risk? To reduce economic exposure, managers

should

1. Distribute productive assets to various locations so the firm’s long-term financial well-being is not severely affected by changes in exchange rates

2. Ensure assets are not too concentrated in countries where likely rises in currency values will lead to increases in the foreign prices of the goods and services the firm produces

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How Can Managers Minimize Exchange Rate Risk? In general, managers should 1. Have central control of exposure to protect resources

efficiently and ensure that each subunit adopts the correct mix of tactics and strategies

2. Distinguish between transaction and translation exposure on the one hand, and economic exposure on the other hand

3. Attempt to forecast future exchange rates4. Establish good reporting systems so the central finance

function can regularly monitor the firm’s exposure position

5. Produce monthly foreign exchange exposure reports

Chapter 11

The International Monetary System

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What Is The International Monetary System?

The international monetary system refers to the institutional arrangements that countries adopt to govern exchange rates

A floating exchange rate system exists when a country allows the foreign exchange market to determine the relative value of a currency the U.S. dollar, the EU euro, the Japanese yen, and

the British pound all float freely against each other their values are determined by market forces and

fluctuate day to day

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A pegged exchange rate system exists when a country fixes the value of its currency relative to a reference currency Many Gulf states peg their currencies to the U.S.

dollar

A dirty float exists when a country tries to hold the value of its currency within some range of a reference currency such as the U.S. dollar China pegs the yuan to a basket of other currencies

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A fixed exchange rate system exists when countries fix their currencies against each other at some mutually agreed on exchange rate European Monetary System (EMS) prior to

1999

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What Was The Gold Standard?

The gold standard refers to a system in which countries peg currencies to gold and guarantee their convertibility the gold standard dates back to ancient times

when gold coins were a medium of exchange, unit of account, and store of value payment for imports was made in gold or silver

10-39

What Was The Gold Standard?

later, payment was made in paper currency which was linked to gold at a fixed rate

in the 1880s, most nations followed the gold standard $1 = 23.22 grains of “fine” (pure) gold

the gold par value refers to the amount of a currency needed to purchase one ounce of gold

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Why Did The Gold Standard Make Sense?

The great strength of the gold standard was that it contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries when the income a country’s residents earn

from its exports is equal to the money its residents pay for imports

It is this feature that continues to prompt calls to return to a gold standard

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Why Did The Gold Standard Make Sense?

The gold standard worked well from the 1870s until 1914 but, many governments financed their World

War I expenditures by printing money and so, created inflation

People lost confidence in the system demanded gold for their currency putting

pressure on countries' gold reserves, and forcing them to suspend gold convertibility

By 1939, the gold standard was dead

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What Was The Bretton Woods System?

In 1944, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a new international monetary system that would facilitate postwar economic growth

Under the new agreement a fixed exchange rate system was established all currencies were fixed to gold, but only the U.S.

dollar was directly convertible to gold devaluations could not to be used for competitive

purposes a country could not devalue its currency by more than

10% without IMF approval

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What Institutions Were Established At Bretton Woods?

The Bretton Woods agreement also established two multinational institutions

1. The International Monetary Fund (IMF) to maintain order in the international monetary system through a combination of discipline and flexibility

2. The World Bank to promote general economic development

also called the International Bank for Reconstruction and Development (IBRD)

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1. The International Monetary Fund (IMF) fixed exchange rates stopped competitive

devaluations and brought stability to the world trade environment

fixed exchange rates imposed monetary discipline on countries, limiting price inflation

in cases of fundamental disequilibrium, devaluations were permitted

the IMF lent foreign currencies to members during short periods of balance-of-payments deficit, when a rapid tightening of monetary or fiscal policy would hurt domestic employment

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2. The World Bank Countries can borrow from the World Bank in two

ways

1. Under the IBRD scheme, money is raised through bond sales in the international capital market

borrowers pay a market rate of interest - the bank's cost of funds plus a margin for expenses.

1. Through the International Development Agency, an arm of the bank created in 1960

IDA loans go only to the poorest countries

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Why Did The Fixed Exchange Rate System Collapse?

Bretton Woods worked well until the late 1960s It collapsed when huge increases in welfare programs

and the Vietnam War were financed by increasing the money supply and causing significant inflation other countries increased the value of their currencies

relative to the U.S. dollar in response to speculation the dollar would be devalued

However, because the system relied on an economically well managed U.S., when the U.S. began to print money, run high trade deficits, and experience high inflation, the system was strained to the breaking point the U.S. dollar came under speculative attack

10-47

What Was The Jamaica Agreement?

A new exchange rate system was established in 1976 at a meeting in Jamaica

The rules that were agreed on then are still in place today

Under the Jamaican agreement floating rates were declared acceptable gold was abandoned as a reserve asset total annual IMF quotas - the amount member

countries contribute to the IMF - were increased to $41 billion – today they are about $767 billion

10-48

What Has Happened To Exchange Rates Since 1973?

Since 1973, exchange rates have been more volatile and less predictable than they were between 1945 and 1973 because of the 1971 and 1979 oil crises the loss of confidence in the dollar after U.S.

inflation in 1977-78 the rise in the dollar between 1980 and 1985 the partial collapse of the EMS in 1992 the 1997 Asian currency crisis the global financial crisis of 2008–2010;

sovereign debt crisis of 2010–2011

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What Has Happened To Exchange Rates Since 1973?

Major Currencies Dollar Index, 1973-2013

10-50

Which Is Better – Fixed Rates Or Floating Rates?

Floating exchange rates provide

1. Monetary policy autonomy removing the obligation to maintain exchange

rate parity restores monetary control to a government

1. Automatic trade balance adjustments under Bretton Woods, if a country developed a

permanent deficit in its balance of trade that could not be corrected by domestic policy, the IMF would have to agree to a currency devaluation

1. Help countries recover from financial crises

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Which Is Better – Fixed Rates Or Floating Rates?

But, a fixed exchange rate system 1. Provides monetary discipline

ensures that governments do not expand their money supplies at inflationary rates

1. Minimizes speculation causes uncertainty

1. Reduces uncertainty promotes growth of international trade

and investment

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Who Is Right?

There is no real agreement as to which system is better

We know that a Bretton Woods-style fixed exchange rate regime will not work

But a different kind of fixed exchange rate system might be more enduring could encourage stability that would facilitate

more rapid growth in international trade and investment

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What Type of Exchange Rate System Is In Practice Today?

Various exchange rate regimes are followed today 21% of IMF members follow a free float policy 23% of IMF members follow a managed float system 5% of IMF members have no legal tender of their own

excludes Euro Zone countries the remaining countries use less flexible systems

such as pegged arrangements, or adjustable pegs

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What Type of Exchange Rate System Is In Practice Today?

Exchange Rate Policies of IMF Members

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What Is A Pegged Rate System?

A country following a pegged exchange rate system pegs the value of its currency to that of another major currency popular among the world’s smaller nations imposes monetary discipline and leads to low

inflation adopting a pegged exchange rate regime can

moderate inflationary pressures in a country

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What Is A Currency Board?

Countries using a currency board commit to converting their domestic currency on demand into another currency at a fixed exchange rate the currency board holds reserves of foreign

currency equal at the fixed exchange rate to at least 100% of the domestic currency issued

the currency board can issue additional domestic notes and coins only when there are foreign exchange reserves to back them

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What Is The Role Of The IMF Today?

Today, the IMF focuses on lending money to countries in financial crisis

There are three main types of financial crises:

1. Currency crisis

2. Banking crisis

3. Foreign debt crisis

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A currency crisis occurs when a speculative attack on the

exchange value of a currency results in a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates in order to defend prevailing exchange rates Brazil 2002

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A banking crisis refers to a situation in which a loss of confidence in the banking system leads to a run on the banks, as individuals and companies withdraw their deposits

A foreign debt crisis is a situation in which a country cannot service its foreign debt obligations, whether private sector or government debt Greece and Ireland 2010

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What Was The Mexican Currency Crisis Of 1995?

The Mexican currency crisis of 1995 was a result of high Mexican debts a pegged exchange rate that did not allow for

a natural adjustment of pricesTo keep Mexico from defaulting on its

debt, the IMF created a $50 billion aid package required tight monetary policy and cuts in

public spending

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What Was The Asian Currency Crisis?

The 1997 Southeast Asian financial crisis was caused by events that took place in the previous decade including1. An investment boom - fueled by huge increases in

exports

2. Excess capacity - investments were based on projections of future demand conditions

3. High debt - investments were supported by dollar-based debts

4. Expanding imports – caused current account deficits

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By mid-1997, several key Thai financial institutions were on the verge of default speculation against the baht

Thailand abandoned the baht peg and allowed the currency to float

The IMF provided a $17 billion bailout loan package required higher taxes, public spending cuts,

privatization of state-owned businesses, and higher interest rates

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Speculation caused other Asian currencies including the Malaysian Ringgit, the Indonesian Rupaih and the Singapore Dollar to fall

These devaluations were mainly driven by excess investment and high borrowings, much of it in

dollar denominated debt a deteriorating balance of payments position

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The IMF provided a $37 billion aid package for Indonesia required public spending cuts, closure of troubled

banks, a balanced budget, and an end to crony capitalism

The IMF provided a $55 billion aid package to South Korea required a more open banking system and economy,

and restraint by chaebol

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How Has The IMF Done?

By 2012, the IMF was committing loans to 52 countries in economic and currency crisis

All IMF loan packages require tight macroeconomic and monetary policy

However, critics worry the “one-size-fits-all” approach to macroeconomic

policy is inappropriate for many countries the IMF is exacerbating moral hazard - when people

behave recklessly because they know they will be saved if things go wrong

the IMF has become too powerful for an institution without any real mechanism for accountability

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How Has The IMF Done?

But, as with many debates about international economics, it is not clear who is right

However, in recent years, the IMF has started to change its policies and be more flexible urged countries to adopt fiscal stimulus and monetary

easing policies in response to the 2008-2010 global financial crisis

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What Does The Monetary System Mean For Managers?

Managers need to understand how the international monetary system affects

1. Currency management - the current system is a managed float - government intervention can influence exchange rates

speculation can also create volatile movements in exchange rates

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What Does The Monetary System Mean For Managers?

2. Business strategy - exchange rate movements can have a major impact on the competitive position of businesses need strategic flexibility

2. Corporate-government relations - businesses can influence government policy towards the international monetary system companies should promote a system that facilitates

international growth and development

Chapter 12

The Global Capital Market

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Why Do Capital Markets Exist?

Capital markets bring together investors and borrowers investors - corporations with surplus cash,

individuals, and non-bank financial institutions borrowers - individuals, companies, and governments markets makers - the financial service companies

that connect investors and borrowers, either directly (investment banks) or indirectly (commercial banks)

capital market loans can be equity or debt

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Who Are the Main Players in Capital Markets?

The Main Players in the Generic Capital Market

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What Makes the Global Capital Market Attractive?

Today’s capital markets are highly interconnected and facilitate the free flow of money around the world

Borrowers benefit from the additional supply of funds global capital markets provide lowers the cost of capital

the price of borrowing money or the rate of return that borrowers pay investors

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Market Liquidity and the Cost of Capital

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Investors benefit from the wider range of investment opportunities diversify portfolios and lower risk

But, volatile exchange rates can make what would otherwise be profitable investments, unprofitable

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Risk Reduction through Portfolio Diversification

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How Have Global Capital Markets Changed Since 1990? Global capital markets have grown rapidly

the stock of cross-border bank loans was just $3,600 billion in 1990, $7,859 billion in 2000, $33,913 billion in 2012

the international bond market has grown from $3,515 billion in 1997, $5,908 billion in 2000, $21,979 billion in 2012

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Why Is the Global Capital Market Growing?

Two factors are responsible for the growth of capital markets

1. Advances in information technology the growth of international communications

technology and advances in data processing capabilities 24-hour-a-day trading so, shocks that occur in one financial market

spread around the globe very quickly

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2. Deregulation by governments has facilitated growth in international capital

markets governments have traditionally limited foreign

investment in domestic companies, and the amount of foreign investment citizens could make

since the 1980s, these restrictions have been falling

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Deregulation began in the U.S., then moved to

Great Britain, Japan, and France Many countries have dismantled capital controls

making it easier for both inward and outward investment to occur

The 2008-2009 global financial crisis raised questions as to whether deregulation had gone too far Question: Are new regulations for the financial

services industry needed?

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What Are the Risks of the Global Capital Markets?

Question: Could deregulation of capital markets and fewer controls on cross-border capital flows make nations more vulnerable to the effects of speculative capital flows? can have a destabilizing effect on economies

Speculative capital flows may be the result of inaccurate information about investment opportunities if global capital markets continue to grow, better

quality information is likely to be available from financial intermediaries

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What Is a Eurocurrency? A Eurocurrency is any currency banked outside

its country of origin About two-thirds of all Eurocurrencies are Eurodollars

dollars banked outside the U.S. Other important Eurocurrencies are the euro-yen, the

euro-pound, and the euro-euro

The Eurocurrency market is an important source of low-cost funds for international companies

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Why Has the Eurocurrency Market Grown?

The eurocurrency market began in the 1950s when the Eastern bloc countries feared that the United States might seize their dollars so, they deposited them in Europe additional dollar deposits came from Western

European central banks and companies that exported to the U.S. could earn a higher rate of interest in London

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In 1957, the market surged again after changes in British laws under the new laws, British banks had to

attract dollar deposits and loan dollars rather pounds to finance non-British trade

London became the leading center of the eurocurrency market continues to hold this position today

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In the 1960s, the market grew once again Changes in U.S. regulations discouraged

U.S. banks from lending to non-U.S. residents would-be borrowers of dollars outside the

U.S. turned to the Euromarket as a source of dollars

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The next big increase came after the 1973-74 and 1979-80 oil price increases

Arab members of OPEC accumulated huge amounts of dollars avoided potential confiscation of their dollars

by the U.S. by depositing them in banks in London

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What Makes the Eurocurrency Market Attractive?

The Eurocurrency market is attractive because it is not regulated by the government banks can offer higher interest rates on

Eurocurrency deposits than on deposits made in the home currency

banks can charge lower interest rates to Eurocurrency borrowers than to those who borrow the home currency

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The spread between the Eurocurrency deposit and lending rates is less than the spread between the domestic deposit and lending rates Gives Eurocurrency banks a competitive

edge over domestic banks

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Interest Rate Spreads in Domestic and Eurocurrency Markets

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What Makes the Eurocurrency Market Unattractive?

The Eurocurrency market has two significant drawbacks:

1. Because the Eurocurrency market is unregulated, there is a higher risk that bank failure could cause depositors to lose funds can avoid this risk by accepting a lower return on a

home-country deposit

1. Companies borrowing Eurocurrencies can be exposed to foreign exchange risk can minimize this risk through forward market

hedges

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What Is the Global Bond Market?

Bonds are an important means of financing for many companies the most common bond is a fixed rate which

gives investors fixed cash payoffs

The global bond market grew rapidly during the 1980s and 1990s and continues to do in the new century

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What Is the Global Bond Market?

There are two types of international bonds

1. Foreign bonds are sold outside the borrower’s country and are denominated in the currency of the country in which they are issued used by companies when they think it will reduce the

cost of capital

1. Eurobonds are underwritten by a syndicate of banks and placed in countries other than the one in whose currency the bond is denominated

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What Makes the Eurobond Market Attractive?

The Eurobond market is attractive because1. It lacks regulatory interference

since companies do not have to adhere to strict regulations, the cost of issuing bonds is lower

1. It has less stringent disclosure requirements than domestic bond markets it can be cheaper and less time consuming to offer

Eurobonds than dollar-denominated bonds

1. It is more favorable from a tax perspective Eurobonds can be sold directly to foreign investors

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What Is the Global Equity Market?

The global equity market allows firms to

1. Attract capital from international investors many investors buy foreign equities to

diversify their portfolios

1. List their stock on multiple exchanges this type of trend may result in an

internationalization of corporate ownership

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What Is the Global Equity Market?

3. Raise funds by issuing debt or equity around the world by issuing stock in other countries, firms

open the door to raising capital in the foreign market gives the firm the option of compensating

local managers and employees with stock provides for local ownership increases visibility with local stakeholders

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How Do Exchange Rates Affect the Cost of Capital?

Adverse exchange rates can increase the cost of foreign currency loans

While it may initially seem attractive to borrow foreign currencies, when exchange rate risk is factored in, that can change firms can hedge their risk by entering into forward

contracts but this will also raise costs

Firms must weigh the benefits of a lower interest rate against the risk of an increase in the real cost of capital

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What Do Global Capital Markets Mean for Managers?

Growth in global capital markets has created opportunities for firms to borrow or invest internationally firms can often borrow at a lower cost than in

the domestic capital market firms must balance the foreign exchange risk

associated with borrowing in foreign currencies against the costs savings

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What Do Global Capital Markets Mean for Managers?

Growth in capital markets offers opportunities for firms, institutions, and individuals to diversify their investments and reduce risk again though, investors must consider

foreign exchange rate risk Capital markets are likely to continue to

integrate providing more opportunities for business

Mba 531 week 4 - overview - chap 10 - 12

Education

Transcript of Mba 531 week 4 - overview - chap 10 - 12