BUSIP AUTUMN 2005
Week 5, The International Financial System
24 – 27 October 2005 Instructor: Donald Marsh
Textbook: Global Business Today, Charles W. L. Hill, 4th Edition
Learning Objectives
The form and functions of the foreign exchange market
How foreign exchange rates are determined
The distinction between spot and forward exchange rates, how the latter are determined, the relationship between exchange rates and interest rates
Interest rate arbitraging
Hedging vs. speculation in the foreign exchange markets
The Euro – its implications for international business and the global economy
Fixed and floating exchange rate systems, government controls and intervention in foreign exchange markets
Forecasting foreign exchange rates
International financial crises – debt and currency crises
Historical development of the global monetary system
The International Monetary Fund and the World Bank
The Eurocurrency market
International sources of financing for the business enterprise and for economic development of less developed countries – pros and cons of different types
Implications of the WTO for the international financial markets
Activities/Assignments
As each student contributes to class discussion, regular attendance is expected. Course grades are based 1/3 on participation in class discussion, 1/3 on a quiz, and 1/3 on written assignments.
Monday: Read Hill pp 310-25. Be prepared to discuss the function of the foreign exchange market, spot and forward exchange rates, how foreign exchange rates are determined, purchasing power parity, the nature of the foreign exchange market, exchange rate risk and an example thereof, how the risk can be reduced, hedging against exchange rate risk vs. speculation in foreign exchange.
Written assignment: Prior to noon 24 October email the instructor a list of 1 to 3 questions or issues related to the global monetary system you would like us to address this week. Include in the email your full name. While email is much preferred, if you do not have email capability you may provide this information in writing at the first class.
Tuesday: Read and be prepared to discuss the subjects covered in Hill pp 325-335.
Written assignment: Turn in at the beginning of class your opinion on whether it is better for a country to have a strong or weak currency. The last 15 minutes of class will be devoted to preparation by teams for their presentations on the case study for Wednesday..
Wednesday: Read and be prepared to discuss the subjects covered in Hill pp 342-57.
Assignment: Case Study, to be addressed by the same teams formed for Week 1: XYZ Company produces basketballs. Fifty percent of its sales are exports to foreign markets and 50% of those sales and operating costs are for basketballs produced in its wholly-owned factories in other foreign countries. From XYZ’s standpoint, is it better for the country in which the company is located to have a fixed or floating exchange rate? In addition to the direct effects on its revenues and costs, you should take into consideration the effects of a fixed or floating exchange rate on the global economy and, hence, XYZ’s own business outlook. Teams will verbally present their responses at the beginning of class. The last 15 minutes of class will be devoted to preparation by teams for their presentations on the Axis hedging case (Hill pp 337-38) Thursday.
Thursday: Read and be prepared to discuss Hill pp 357-70. Also be prepared to discuss a) whether you think the IMF and World Bank have contributed to or detracted from international monetary stability and economic development and b) how currency and debt crises can be prevented. The following subjects not covered in the Hill text will also be addressed: international money markets including the eurocurrency market; international sources of financing for the business enterprise including pros and cons of different types; opportunities for the business enterprise in international investing, both portfolio and direct; and how international capital flows can contribute to economic development and reduce the gap between rich and poor countries with implications beyond those just economic. Assignment: At the beginning of class team presentations on the Axis hedging case.