International Business

Wendy Jeffus

Harvard Summer School

International Business

Introduction International Trade & Global Competition Chapter 8: Regional Economic Integration Case Study: Boeing vs. Airbus: Two Decades of

Trade Disputes Chapter 9: The Foreign Exchange Market

Session II - Countries Tier I (A)

– Fernando ($11000) + 8 pennies Tier I (B)

– James ($20,500) + 1 penny Tier II (D)

– Andy ($8500) + 8 pennies Tier II (E)

– Bernadette ($5,000) + 1 penny Tier II (F)

– Andrew ($11,500) + No pennies Tier III (H)

– Ipek ($14,000) + 3 pennies Tier III (I)

– Nethra ($7000) + 1 penny

4:10 (By the clock on the wall) Is the END of the game.

Trade Simulation Starting Output Prices

– Small Triangle $500– Circle $500– Half-Moon with circle cut out $1,000– Large Triangle with Half-moon cut out $1,500– Parallelogram with Square cut out $1,500

Power Brokers’ Price List– Environmental Token $500– Pencil $3,000– White Paper (2 sheets) $3,000– Labor (per person) $4,000– Compass $5,000 (sold out)– Protractor $7,000 (sold out)– Pencil Sharpener $8,000– Red Paper (1 full sheet) $10,000– Ruler $10,000– Scissors $12,000

The Bankers will pay you in cash for the shapes. You will need this cash to provide for the subsistence of your people (at $500 per person per year). You may also use this cash to purchase additional capital, raw materials, labor, and environmental tokens.

You will be given 10 tokens at the start of each year. You can trade with other countries to get additional tokens and/or you can buy more tokens from the Power Brokers. At the end of each year, you must turn in any leftover tokens for which you will receive $500 each.

1. Meet your production quota - by paying the Chief Economist $500 for each citizen of your country. If you do not have enough money, then some of your people will starve, and DIE!

2. Protect and/or clean up your environment - by giving the Chief Economist one environmental token (penny) for each $1000 worth of shapes which you produced and sold to the bank. If you do not have enough tokens, the pollution will be so toxic that some of your people will DIE!

Designing Negotiation Strategies Organizing to influence – creating, staffing, funding, and directing

institutions in ways that influence the trade negotiation process. Selecting the forum – identifying the most promising forum in which to

pursue one’s objectives and then ensuring that negotiations take place there.

Shaping the agenda – adding or removing issues from the agenda, dividing the larger agenda into modules for parallel negotiations, and establishing some high-level principles to govern the process.

Building coalitions – identifying potential winning and blocking coalitions and then devising plans for building supportive coalitions and breaking or forestalling opposing ones.

Leveraging linkages – linking and de-linking issues or sets of negotiations in order to create and claim value.

Playing the frame game – crafting and promulgating a favorable framing of “the problem” and “the options”

Creating momentum – channeling the flow of the negotiations process in promising directions by establishing appropriate stages to take advantage of action forcing events.

http://www.petersoninstitute.org/publications/chapters_preview/392/02iie3624.pdf

Wendy Jeffus

Harvard Summer School

Chapter 8: Regional Economic Integration

Introduction Trend - Regional Economic Integration

Regional Trade Agreements – – Agreements among countries in a geographic region to reduce,

and ultimately remove, tariff and non-tariff barriers to the free flow of goods, services, and factors of production.

Gulf Cooperation Council & EFTA sign free trade agreement

June 22, 2009 (Norway) after extensive negotiations which started in February 2006 and went on till April 2008.

Agreement covers areas such as commercial trade, exchange of services, intellectual property protection, governmental purchases, and methodology for arbitrating conflicts. In addition, the agreement seeks economic partnership through investments and the reduction of customs duties on most goods exchanged by both sides, especially agricultural goods.

http://www.menareport.com/en/business,real_esta/249043

GCC: Bahrain Qatar Kuwait Oman Saudi Arabia United Arab Emirates

European Free Trade Association: Iceland Liechtenstein Norway Switzerland

Levels of Economic Integration Free trade area

– Barriers to trade are removed, but each country determines its own external trade policy Example: European Free Trade Association (Norway, Iceland, Liechtenstein, & Switzerland)

– Basically for industrial goods (i.e. heavy equipment) Customs union

– Internal barriers to trade are removed and a common external trade policy is adopted Example: Andean Community of Nations (Bolivia, Colombia, Ecuador, & Peru)

– Common external tariffs 5 – 20% Common market

– Has no barriers to trade between member countries, includes a common external trade policy, and also allows factors of production to move freely between members.

Example: MERCOSUR (Argentina, Brazil, Paraguay, & Uruguay) Economic union

– Involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy, but it also requires a common currency, harmonization of members’ tax rates, and a common monetary and fiscal policy.

Example: EU (although not all members have adopted the common currency) Political union

– Occurs when a central political apparatus coordinates the economic, social, and foreign policy of the member states

Example: United States

Levels of Economic Integration

Case for Integration Economic Arguments

– Stimulates economic growth in member countries– Increases FDI and world production– Countries specialize in goods and services that can be efficiently

produced– Creates additional gains from free trade beyond the international

agreements such as GATT and WTO Political Arguments

– Economic interdependence creates incentives for political cooperation

This reduces the potential for violent confrontation– Together, the countries have more economic clout to enhance

trade with other countries or trading blocs

Impediments to Integration Integration is hard to achieve and sustain

– Nations may benefit but groups within countries may be hurt.

Example: (Canadian & U.S. textile workers)

– Potential loss of sovereignty and control over domestic issues (especially for the “economically weaker” members)

Trade Creation & Trade Diversion Economists point out that the benefits of regional

integration are determined by the extent of trade creation, as opposed to trade diversion

– Trade creation occurs when high cost domestic producers are replaced by low cost producers within the free trade area.

Example: NAFTA/Mexico, EU/Poland – Trade diversion occurs when lower cost external suppliers are

replaced by higher cost suppliers within the free trade area. Example: Britain imported lamb from New Zealand, until the EU

imposed the common external tariff. Now Britain imports lamb from France.

Evolution of the European Union Product of two political factors:

– A desire for peace (after the devastation from WWI & WWII)

– A desire for strong political & economic position on the world stage

The Euro

http://en.wikipedia.org/wiki/Euro

Key Dates 1951 - European Coal and Steel

Community. 1957- Treaty of Rome establishes

the European Community 1993 – Treaty of Maastricht

established the European Union January 1, 1999 11 countries January 1, 2001 + Greece - Greek

drachma (GRD) exchange rate of 340.750000

January 1, 2002 old currencies were not accepted

– Actually you could exchange currency for about 2 months until February 28, 2002.

Source: Wikipedia.org

EU Membership

EU Membership

Image Source: Wikipedia.org (EU)

Recent News:Sweden’s Agendahttp://news.bbc.co.uk/2/hi/europe/8117103.stm

Economic Gains of 1 Currency Reduced exchange costs Reduced currency risk Increased price competition Major investment and export opportunities for

firms within region Allows firms to optimize mix of resources to

reduce overall costs

The Single European Act This act committed member countries to work toward the

establishment of a single market by December 31, 1992

The act was born out of:– Frustration among members of the European Community regarding the

barriers to the free flow of trade and investment between member countries

– A need to harmonize the wide range of technical and legal standards for doing business

Objectives:– Abolish delays and reduces costs of trade bureaucracy– “Mutual recognition” of product standards– Allow foreign low cost suppliers to compete– Lift barriers to banking and insurance competition– Remove restrictions on foreign exchange transactions and trucking

The Single European Act Benefits:

– Savings from using only one currency

– Easy to compare prices, resulting in lower prices

– Forces efficiency– Creates liquid pan-Europe

capital market– Increases range of

investments for individuals and institutions

– As of 2009 Euro strong against the dollar.

Costs:– Countries lose monetary

policy control European Central Bank

controls policy for the “Euro zone”

– EU is not an “optimal currency area”

Country economies are different

– Euro puts the economic cart before the political horse

– Strong Euro (2009) makes it harder for Euro zone exporters to sell their goods

Enlargement of the European Union To qualify for EU membership applicants must:

– Privatize state assets– Deregulate markets– Restructure industries– Control inflation– Include EU laws into their own systems– Establish stable democratic governments– Respect human rights

Current Candidate Countries: Croatia, Macedonia, and Turkey.

– http://ec.europa.eu/enlargement/candidate-countries/index_en.htm

NAFTA The North American Free Trade Agreement (NAFTA)

became law January 1, 1994 NAFTA includes the following:

– Over 10 year period: tariffs reduced (99% of goods traded)– Removal of most barriers on cross border flow of services– Removal of restrictions on FDI except in certain sectors

Mexican railway and energy US airline and radio communications Canadian culture Protection of intellectual property rights Applies national environmental standards Establishment of commission to police violations

The Case For & Against NAFTA Pros

– Enlarged and productive regional base

– Labor-intensive industries move to Mexico

– Mexico gets investment and employment

– Increased Mexican income to buy US/Canada goods

– Demand for goods increases jobs

– Consumers get lower prices

Cons– Loss of jobs to Mexico– Mexican firms have to

compete against efficient US/Canada firms

Mexican firms become more efficient

– Environmental degradation– Loss of national

sovereignty

NAFTA Results Recent surveys indicate that NAFTA’s overall impact has

been small but positive– From 1993 to 2004, trade between NAFTA’s partners grew by

250 percent– Canada’s trade with NAFTA partners increased from 70% to

more than 80% of all Canadian foreign trade– Mexico’s trade with NAFTA partners increased from 66% to 80%

of all Mexican foreign trade All countries experienced strong productivity growth According to some sources, the United States has lost

110,000 jobs per year due to NAFTA– Many economists dispute this figure because more than 2 million

jobs a year were created in the US during the same time period

Most Active Regional Trade Blocs

http://en.wikipedia.org/wiki/Trade_blocks

The Andean Community Bolivia, Colombia, Ecuador,

Peru, Venezuela Nearly failed. Rejuvenated in

1990 Changed from FTA to customs

union in 1992 Still has many political and

economic problems

In the news… July 2, 2009 - United States has decided to remove

Bolivia from the Andean Trade Preference Act, a bill that allows many goods from Colombia, Bolivia, Ecuador, and Peru to enter into the United States duty free.

– The idea behind the act is that providing tariff free access to the U.S. market will help convince farmers to stop growing coca in favor of another commodity.

– Bolivia was removed because it is not doing enough to reduce the cultivation of coca.

– The U.S. Trade Representative to Bolivia said there has been "explicit acceptance and encouragement of coca production at the highest levels of the Bolivian government."

– Coca is seen as a cultural crop in Bolivia, where it is used for numerous reasons other than cocaine (such as religious ceremonies and as a mild sedative).

http://www.examiner.com/x-9463-NY-International-Security-Examiner~y2009m7d2-Wake-up-Evo-Morales; Image Bolivia Coca tea (google images)

Mercosur 1988: Argentina, Brazil. 1990:

Paraguay, Uruguay 1995: Agreed to move toward a

full customs union Trade quadrupled between 1990-

1998 Has significant trade diversion

issues Revival in 2003 by Brazil’s

president to be modeled after EU with common currency and elected parliament

2006: Venezuela

Mercosur Summit moved to July 24 – 25th

Political issues: The delayed incorporation of Venezuela The A/H1N1 virus pandemic, Protectionism and hurdles to intra-trade Bilateral disputes

– Argentina and Uruguay paper mills – Brazil and Paraguay over the sale of power from the

hemisphere’s largest operational hydroelectric complex

http://www.vheadline.com/readnews.asp?id=81021http://en.mercopress.com/2009/06/12/public-opinion-rapidly-loosing-enchantment-with-mercosurhttp://en.mercopress.com/2009/07/03/mercosur-agrees-on-the-agenda-for-the-presidential-summit

Other Associations Central American Common Market

– 1960s: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua.– Collapsed in 1969

CARICOM– 1973: English-speaking Caribbean countries– 1991: Failed for third time to establish common external tariff

Free Trade Area of the Americas– Two stumbling blocks include intellectual property rights and reductions

in agriculture subsidies

http://www.globalexchange.org/campaigns/ftaa/

ASEAN Countries Association of Southeast

Asian Nations– Created in 1967– Objective to achieve free

trade between member countries and achieve cooperation in their industrial

– Brunei, China, Indonesia, Laos, Malaysia, the Philippines, Myanmar, Singapore, Thailand, and Vietnam

– Progress limited by Asian financial crisis of the 90’s

APEC Countries ‘Promote a sense of

community’ 18 members

– 50% of world’s GNP– 40% of global trade

Despite slow progress, if successful, could become the world’s largest free trade area

Asia Pacific Economic Cooperation

Founded in 1990 to ‘promote open trade and practical economic cooperation

African Union

The only African state that is not a member of the African Union is Morocco, which left the AU's predecessor, the Organisation of African Unity (OAU), in 1984.

Source: Wikipedia.org

Implications for Managers Opportunities:

– Creation of single markets Protected markets, now open Lower costs doing business in single market

Threats:– Differences in culture and competitive practices make realizing

economies of scale difficult– More price competition– Outside firms shut out of market– EU intervention in M&A

Global Peace Index

http://www.visionofhumanity.org/gpi/results/world-map.php

Case Study Boeing vs. Airbus: Two Decades of Trade

Disputes Present a 5-10min (timed) assessment of the

case (answer case questions) All group members must participate.

Wendy Jeffus

Harvard Summer School

9: The Foreign Exchange Market

Definitions Foreign exchange market

– A market for converting the currency of one country into the currency of another.

Exchange rate– The rate at which one currency is converted into another

Foreign exchange risk– The risk that arises from changes in exchange rates

Spot exchange rate– Rate at which a dealer converts one currency into another

currency on a particular day Forward exchange rate

– An exchange rate governing future transactions (can be used to reduce foreign exchange risk)

The FX Market The following participants operate within the FX market:

– Individuals (investors and tourists)

– Speculators and arbitragers

– Governments (central banks and treasuries)

– Brokers and dealers

– Businesses Payments for exports & purchases from foreign suppliers Foreign income (licensing, royalty payments, etc.) Investment/Speculation/Hedging activities

FX Rates and Quotations Most foreign exchange transactions involve the US

dollar.

Professional dealers and brokers may state foreign exchange quotations in one of two ways:

– European Terms - the exchange rate between the US dollar and Japanese yen is stated in European terms by the WSJ below ¥106/$

– American Terms - the exchange rate between US dollars and the Japanese yen can also be stated in American terms $0094/¥.

http://markets.ft.com/markets/overview.asp, http://online.wsj.com/public/page/2_1569.html?mod=2_1569

FT vs. WSJ

FX Quotations Be careful reading FX quotes, know which

currency is first.

Source: http://online.wsj.com/mdc/page/marketsdata.htmlhttp://finance.yahoo.com/currency-investing

¥/$

FX Market Foreign Exchange Market (FX Market) World’s largest financial market ($2.5 trillion

average daily turnover) Open 24 hours a day, 6 days a week

– Sunday at 5pm (EST) to Friday 4:30pm (EST)

Sydney & Tokyo west to Hong Kong & Singapore to Bahrain to Frankfurt, Zurich, & London to New York to Chicago to San Francisco & LA

Currency Hedging Volkswagen, Europe’s largest carmaker, reported a

95% drop in Q4’03 profits. Two causes stood out:

– The unprecedented rise in the value of the Euro against the dollar

– Volkswagen’s decision to only hedge 30% of its foreign currency exposure as opposed to the 70% it had traditionally hedged.

Example:– Suppose the Jetta costs €14,000 to manufacture & ship from

Germany to the U.S. where it sells for $15,000.– If the exchange rate is $1 = €1, VW earns €1,000 on the sale.– If the dollar depreciates to $1.25 = €1 (or $1 = 0.80€) the

$15,000 price will only convert to €12,000.– In other words, VW would lose €2,000 on every Jetta sold!

Hedging Fuel In 2001, LUV substantially increased its hedging strategy. In 2004, more than 80% of its fuel needs were hedged at a price of

$24 a barrel. – Without this hedge, Q1’04 profit of $26M would have been a loss of

$8M! Both AMR and CAL reported losses in Q1’04! Why didn’t these airlines hedge fuel costs?

1. Hedging requires credit lines or cash which has been in short supply to airlines.

2. The airline industry attracts executives that like to take risks.

Photo Source: wikipedia.org http://www.usatoday.com/travel/news/2004-05-07-swa-oil_x.htm

Economic Theories of Exchange Rate Determination:

Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of another– Law of One Price– Purchasing Power Parity (PPP)– Money supply and price inflation– Investor psychology and “Bandwagon” effects

Exchange Rate Determination

Note: For additional information on exchange rates see: www.wendyjeffus.com,Exchange Rate Determination (A) and (B) under “International Finance”

Law of One Price In competitive markets, identical products sold in

different countries should sell for the same price when their price is expressed in terms of the same currency.

– Assumptions: No transportation costs No barriers to trade Tradable goods

Example: If the euro/dollar exchange rate is 0.78EUR/USD.

– A jacket selling for $50 in New York should retail for €39.24 in Paris ($50 x 0.78EUR/USD = €39.24)

Example 1 You can rent a compact car in Washington, D.C. for

$31.99 You can rent a compact car in Bangkok, Thailand for

4000.00 BHT Therefore the exchange rate should be =

4000.00BHT/31.99USD = 125.04BHT/USD

Source: Avis.com

PPP & The Law of One Price The implied exchange rate based on the

absolute theory of PPP is 4000.00BHT/31.99USD = 125.04BHT/USD

But the actual exchange rate today is 32.81BHT/USD.

Is the baht over or under valued vs. the dollar?

Calculate (implied – actual) / actual. 125.04 – 32.81 / 32.81 = 281% The baht is overvalued by 281% vs. the dollar.

Example 2

http://www.burj-al-arab.com/ http://boston.langhamhotels.com/

You can enjoy a chocolate lunch for $30 per person at the Langham hotel in Boston.

You can enjoy a chocolate lunch for 250 AED per person at the Burj Al Arab hotel in Dubai.

Therefore the exchange rate should be 8.33AED/USD.

PPP & The Law of One Price Given this information, the exchange rate should

be 8.33AED/USD. The actual exchange rate today is

3.6720AED/USD. Is the UAE Dirham over or under valued?

Calculate (implied – actual) / actual. 8.33 - 3.6720 / 3.6720 = 126% The UAE Dirham is overvalued by 126%.

The Big Mac Hamburger Standard The Economist developed the Big Mac Standard

to track PPP:– Assuming that the Big Mac is identical in all countries,

it serves as a comparison point as to whether or not currencies are trading at market prices.

– A Big Mac in Switzerland costs Sfr6.30 while the same Big Mac in the US costs $2.54.

– The implied PPP of this exchange rate is:

$Sfr2.4803/ $2.54

Sfr6.30

The Big Mac Hamburger Standard However, on the date of the survey, the actual

exchange rate was Sfr1.73/$, therefore the Swiss franc is overvalued by:

43.37% or 1.4337 Sfr1.73

Sfr2.4803

Big Mac Index The Economist's Big Mac

index is based on the theory of purchasing-power parity.

– The cheapest burger is in China, where it costs $1.30, compared with an average American price of $3.15. This implies that the yuan is 69% undervalued.

– 3.15/1.30 = 2.46– Actual rate on 01/09

= 8.0680– 2.46/8.06 – 1 = -69%

Memories of your class…

Submitted by BC Student (Costa Rica) 2009

Latte Index The Economist asked: what

can the price of Starbucks coffee—now served in as many as 32 countries—tell us about exchange rates?

– The theory of purchasing-power parity (PPP) says that, in the long run, exchange rates should move towards levels that equalize the prices of a basket of goods and services in different countries—ie, a dollar should buy the same amount of stuff everywhere.

Source: “Burgers or beans?” Jan 15th 2004 The Economist A new theory is percolating through the foreign-exchange markets

Example Senegal Rumors have it there are 2 local beers:

1. Gazelle

2. Flag Flag sells for CFA 300.

CFA 300 is the price in local currency [1]

The spot rate was 96.80 CFA Franc = 1 South African Rand, so the price in rand = 3.10 [2]

Implied PPP = 3.10/2.30 = 1.35 [3] 1.35/96.80 = 1.39%, which means

the CFA franc was overvalued by 1.35% versus the rand.

Photo Source: Modified from www.mapsofworld.com/africa-political-map.htmhttp://www.thebackpacker.net/worldbeers/senegal/index.htmCFA stands for Communauté financière d'Afrique ("Financial Community of Africa").http://www.oanda.com/convert/fxhistory (CFA price is as of 3/13/99)http://www.corporatefinance101.com/fundamentals.of.corporate.finance/fundamentals.of.corporate.finance-615.html

The Beer Standard

Country Beer Currencyin local

currencyin

RandImplied

PPPSpot

(3/15/99)Under/Over

valued[1] [2] [3] [4] [5]

South Africa Castle Rand 2.3 2.3 NA NA NABotswana Castle Pula 2.2 2.94 0.96 0.75 27.54%Ghana Star Cedi 1,200 3.17 521.74 379.1 37.63%Kenya Tusker Shilling 41.25 4.02 17.93 10.27 74.63%Malawi Carlsberg Kwacha 18.5 2.66 8.04 6.96 15.57%Mauritius Phoenix Rupee 15 3.72 6.52 4.03 61.83%Namibia Windhoek N$ 2.50 2.5 1.09 1 8.70%Zambia Castle Kwacha 1,200 3.52 521.74 340.68 53.15%Zimbabwe Castle Z$ 9 1.46 3.91 6.15 -36.37%Source: International Finance, Chapter 4 (Economist , May 8, 1999)[2] local price / [4][3] Implied PPP = Price in local currency / 2.30[4] local / rand As of 3/15/99[5] % Over (Under) = (Implied PPP / Spot) - 1

Interest Rates & Exchange Rates Theory says that interest rates reflect

expectations about future exchange rates.– Fisher Effect– International Fisher Effect

Fisher Effect Fisher Effect A country’s “nominal” interest rate (i) is the sum

of the required “real” rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I).

i = r + I

International Fisher Effect International Fisher Effect (IFE) For any two countries the spot exchange rate (S) should

change in an equal amount but in the opposite direction to the difference in nominal interest rates (i) between the two countries.

(S1 – S2)/S2 x 100 = i$ - iDM

Insuring against FX Risk Forward exchanges occur when two parties agree to exchange

currency and execute the deal at some specific date in the future– Exchange rates governing such future transactions are referred to as

forward exchange rates– For most major currencies, forward exchange rates are quoted for 30

days, 90 days, and 180 days into the future When a firm enters into a forward exchange contract, it is taking out

insurance against the possibility that future exchange rate movements will make a transaction unprofitable by the time that transaction has been executed

Investor Psychology & Bandwagon Effects Evidence suggests that neither PPP nor the International

Fisher Effect are good at explaining short term movements in exchange rates

Explanation may be investor psychology and the bandwagon effect

– Investor Psychology Example: if the market is bullish on the dollar, then the dollar is likely

to strengthen versus other currencies.

– Bandwagon Effect Examples: Investors sell their positions to get out of a falling asset.

Exchange Rate Forecasting Individuals that believe in the efficient market theory believe that

prices reflect all available public information– Forward rates should be unbiased predictors of future spot rates

Individuals that feel there is an inefficient market believe that prices do not reflect all available information

– Forward exchange rates will not be the best possible predictor of future spot exchange rates

– If this is true, it may be worthwhile for international businesses to invest in forecasting services

Approaches to Forecasting– Fundamental analysis

Draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements

– Technical analysis Uses price and volume data to determine trends

Technical Analysis Where is the dollar headed versus the yuan?

Currency Convertibility In some countries the ability to convert currency is restricted by the

government. Government restrictions can include

– A restriction on residents’ ability to convert the domestic currency into a foreign currency

– Restricting domestic businesses’ ability to take foreign currency out of the country

Governments will limit or restrict convertibility for a number of reasons that include:

– Preserving foreign exchange reserves– A fear that free convertibility will lead to a run on their foreign exchange

reserves – known as capital flight

A Note on Barter Barter (or Countertrade) is when companies

trade goods and services rather than entering foreign exchange markets or paying cash. – The Economist adds that “[Barter] is often popular

when the quality of money is low or uncertain, perhaps because of high inflation or counterfeiting, or when people are asset-rich but cash-poor, or when taxation or extortion by criminals is high.”

Barter (Continued) It’s a huge industry!

In fact, the International Reciprocal Trade Association (www.irta.com) estimates that the annual value of barter trade by North American Companies is approximately $10B…– …and that over a half a million firms will use the

services of commercial barter companies this year.

Examples General Motors swapped locomotives for tea in

Sri Lanka. Coca Cola has traded for Korean toothpick frills

and Bulgarian forklifts. In the Balkans, McDonnell Douglas accepted

crystal software, cutting tools, leather coats and canned hams--yes, canned hams--as partial payments for jet aircraft!

Source: www.cfoasia.com/archives/9811-48.htm

Barter…

Tina Ames, owner of Craftsmen Cafe, got a new roof in exchange for a pickup truck she no longer needed.

Silver Cup Coffee owner Christian Kar has bartered for Web site design, a walk-in freezer, a phone system, vehicle maintenance, plumbing, catering for a company party and a parking lot paint job.

Joe Gallenberger, owner of Cream City Music, often trades guitars for advertising

http://money.cnn.com/2009/06/23/smallbusiness/fair_trade.fsb/

How many Chickens is a Fighter Jet Worth? Thai economists are trying to work out the answer as the Government is

hoping to barter chickens and rice to pay for everything from military aircraft to subway trains.

When the Prime Minister opened the bidding for Thailand's Bt1.7 trillion public works program, he said his Government was interested in alternative "financing mechanisms" — namely, bartering.

The highlight of the new projects is an expansion of the public transport system, expected to cost Bt550 billion. The Defense Ministry also wants to barter for fighter jets it is considering buying from Russia, Sweden or the US.

The Government believes that bartering for such big-ticket items would help keep the country's foreign debt ratio below 50 per cent of gross domestic product.

– The scheme envisions trading farm goods already in government stocks, such as surplus rice, instead of using cash for at least part of the payment to foreign companies.

– A barter trade committee has been created to assess the bids for the public works projects and negotiate how much chicken, rice or tapioca could be used to finance the deal.

Some foreign companies are skeptical.– French engineering conglomerate Alstom, doubted whether barter was the best

payment option. "A company like us, we don't do barter, we sell trains. We cannot sell chickens," said Nazir Rizk, who heads the Thai subsidiary.

http://www.theasianjournal.com/2006newsqtr1/20060129-1.htm

Implications for Managers It is critical that international businesses

understand the influence of exchange rates on the profitability of trade and investment deals – Adverse changes in exchange rates can make

apparently profitable deals unprofitable

And remember to: “think outside of the box”

Conceptual Comparison of Transaction, Operating and Accounting Foreign Exchange Exposure

Moment in time whenexchange rate changes

Translation(Accounting) exposure

Transaction exposure

(Economic) Operating exposure

Time

Changes in reported owners’ equityin consolidated financial statementscaused by a change in exchange rates

Change in expected future cash flows arising from an unexpected change inexchange rates

Impact of settling outstanding obligations entered into before changein exchange rates but to be settled after change in exchange rates

Reducing FX Exposure Reducing Translation and Transaction Exposure

– These tactics are primarily designed to protect short-term cash flows from adverse changes in exchange rates

Firms can use a lead strategy – An attempt to collect foreign currency receivables when a foreign

currency is expected to depreciate Expect foreign depreciation: Collect Early

– Paying foreign currency payables before they are due when a currency is expected to appreciate

Expect foreign appreciation: Pay Early Firms can use a lag strategy

– An attempt to delay the collection of foreign currency receivables if that currency is expected to appreciate

Expect foreign appreciation: Collect Late– Delay paying foreign currency payables if the currency is expected to

depreciate Expect foreign depreciation: Pay Late

Reducing Economic Exposure Reducing economic exposure requires strategic

choices that go beyond the realm of financial management – The key to reducing economic exposure is to

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

Other Steps Central control of exposure

– to protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies

Forecasts of future exchange rate movements Establish good reporting systems & monthly FX

exposure reports.– so the central finance function can regularly monitor the firm’s

exposure positions.

Project Topics – Due Next Class Final Project Topics Due Next Class:

– 1 slide - 2 minutes - 3 copies (include each team member’s name)