International monetary system and exchange rate policies.

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From the e-Activity, determine key reasons why a multinational corporation might decide to borrow in a country such as Brazil, where interest rates are high, rather than in a country like Switzerland, where interest rates are low. Provide support for your rationale.

  • * From the scenario, select two (2) potential international markets in which TFC may wish to do business. Compare the currency markets of the two (2) countries you have chosen with that of the U.S. dollar. Based on currency considerations only, recommend whether or not TFC should expand to the international markets that you have chosen.
  • Propose two (2) applications of knowledge that you have learned in this course to your current or a future position.Rate the three (3) most important concepts that you learned in this course in order of importance (one (1) being the most important; three (3), the least). Provide a rationale for your ratings.
  • FIN534 Week 10 Scenario Script: International monetary system and exchange rate policies.

    Slide #

    Scene/Interaction

    Narration

    Slide 1

    Intro Scene

    Create input for student to type their name in.

    Slide 2

    Scene 2

    FIN534_10_2_Don-1:    Good day, everyone.   This is a big day for the company; we will find out if we will be expanding out west or not!

    Joe is meeting with the Board of Directors about the expansion project.  He is reviewing all of the information that you have thoroughly analyzed.

    FIN534_10_2_Don-2:    When you think about it, you have done several analyses in such a small time window.We really pushed you and the results have been impeccable! We are presenting a good case for expansion but the Board is cash conscious so I am not sure how they are going to vote. I like to think that the “C” in TFC is for “Cash” and not “Center”.

    FIN534_10_2_Linda-1:    Don, we have really learned a lot about TFC over this time as well.  One thing for sure is there is a lot of analysis that goes into a project no matter the size.I can’t even imagine what it would be like if we decided to expand internationally?

    FIN534_10_2_Don-3:    That is interesting that you should mention international expansion as TFC has that in its long term planning.

    So, as we wait for a decision to be made on the west coast expansion project, we would like you to look at one more area of consideration.  This area includes the international monetary system including exchange rates.  This is only in the discussion phase, so don’t worry about completing another full analysis like we did with the expansion project.  This is only for information gathering.  I bet you are happy to hear that!  <laughter>

    Slide 3

    Scene 3

    •      Linda in conference room

    •      Cash Budget on Screen

    •      Go to next slide

    FIN534_10_3_Linda-1:      Thanks, Don.  I remember my international finance course at Strayer University. We learned about the factors that influence trade and capital flows and the economic variables that influence exchange rate movements.

    FIN534_10_3_Linda-2:       Money is considered a medium of exchange and every nation has some form of monetary system in place.  We use the dollar as our means of exchange.  In many countries in Europe the Euro is used.  And in Japan there is the Yen.  Whereas Hong Kong has the Hong Kong dollar.

    It is important for one to know the exchange rates and how each country’s monetary system works, as that may contribute to additional risk by a company when dealing internationally.

    FIN534_10_3_Linda-3:       Let’s get back to the United States.  In the U.S., the Federal Reserve is the monetary authority.  Its prime responsibility is to try to have the economy grow while keeping inflation in check.

    But when it comes to trading between nations with different currencies, the international monetary system is used in determining how companies in different nations can exchange with another.

    Let’s look at some exchange rate systems over time.

    Slide 4

    Scene 4

    ·         Exchange Rates

    ·         Linda speaking

    FIN534_10_4_Linda-1:       The first system was called the Fixed Exchange Rate System.  With this system, non U.S. currencies were tied to the U.S. dollar.  The U.S. dollar was tied to gold at thirty five dollars an ounce. During this time, the United States would try to ensure that the price of gold would stay at thirty five dollars an ounce, hence keeping it fixed, while other countries used these monetary policies to keep their exchange rates within reason of the United States.  It is also used to control inflation.

    FIN534_10_4_Linda-2:   This might sound like a good system but there were flaws.  Mainly the reasons for spikes or drops in the economy were not being addressed.For example, if the demand for the Hong Kong dollar was high, steps would be taken by Hong Kong to put more Hong Kong dollars into the economy.

    FIN534_10_4_Linda-3:   With this system, countries would basically fabricate the supply and demand system instead of looking at the real reasons behind the rise or fall in currency prices.  As you probably guessed, a system like this one didn’t last too long.

    Slide 5

    •      Exchange Rate systems

    FIN534_10_5_Linda-1:   Another system is called the Floating Exchange Rates; it is also called the fluctuating exchange rate. With this system, the prices of currency for countries are based on supply and demand in regard to international trade and investing.So, the exchange rates float as supply and demand varies.

    FIN534_10_5_Linda-2:  With the Floating Exchange Rate system, domestic currency can appreciate or depreciate against foreign currency.This fluctuation produces an exchange rate risk.

    FIN534_10_5_Linda-3:  Another system is the Managed Floating Rate system. With this system, there is a lot of government involvement in controlling a country’s exchange rate by managing the supply and demand for the country.

    FIN534_10_5_Linda-4:  And a fourth system is a Pegged Exchange Rate system.  Under this system, a country’s currency exchange rate follows the currency of another country or a conglomerate of country currencies.  However, if the exchange rate for a country starts to vary too much from what the pegged country’s established, the country’s government may become highly involved to ensure the currency exchange rate is back on track.

 
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