need to understand the pegging. Pegging is an idea of fixing the exchange rate of currency with the value of another’s country currency or to a basket of value‚ generally a small economy peg its currency with the currency of big economy so as to stabilize the value of the currency. The main issue to deal with are 1) The impact of pegging on china and other economies 2) Why China never wanted to De peg its currency? 3) The basis on which De-pegging should be done? 4) Other competitive advantage
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Chapter 9 Mini Case – McDonald’s Corporation’s British Pound Exposure 1. How does the cross currency swap effectively hedge the three primary exposures McDonalds has relative to its British subsidiary. In general‚ cross currency swap is a contract to swap currencies of debt service obligation (Eiteman‚ Stonehill‚ & Moffett‚ p. 245). For example‚ McDonalds needs to swap pound denominated fixed interest rate and adopt floating interest rate from the US headquarter. The need to enter into swap agreement
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changing due to changes in currency exchange rates. It is the risk that an investor will have to close out a long or short position in a foreign currency at a loss due to an adverse movement in exchange rates. Foreign Exchange Risk is also known as "currency risk" or "exchange-rate risk”. This risk usually affects businesses that export and/or import‚ but it can also affect investors making international investments. For example‚ if money must be converted to another currency to make a certain investment
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to fluctuate according to the foreign exchange market. Free floating exchange rate is determined by the interaction of currency supplies and demands with no government intervention. It always termed “self- correcting’ as if any differences in supply and demand‚ the exchange rate will automatically be corrected in the market. For instance‚ if demand for one country’s currency is low‚ its value will decrease and vice versa. Thus the imported goods will become more expensive and stimulating demand
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If you have ever traveled to a country that does not use U.S currency‚ then you had to exchange your U.S. dollars into the country’s currency that you have just traveled to. You may notice that your U.S dollars have gotten you more or less of the other currency. This means you have just been affected by the exchange rate. If you have 1‚000 U.S dollars it does not mean you will have an equal amount in another country’s currency. Exchange rates effects our economy greatly‚ because we have
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between an optimum currency area and a fixed exchange rate system. Optimum currency area is when a group of nation currencies are linked to through permanently fixed exchange rates and the conditions that would make such an area optimum. Fixed is when value of a country ’s currency‚ in relation to the value of other currencies‚ is maintained at a fixed conversion rate. What are the main advantages and disadvantages of an optimum currency area? The main advantage of optimum currency area is that more
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MIDTERM REVIEW QUESTIONS NOVEMBER 2010: Zahlungsbilanz und Devisenmarkt (1) What accounts for most of the activity in the foreign exchange market? (a) Inter-bank trading (b) Government transfers (c) Sale of good and services (d) Government purchase of assets (e) Foreign imports Answer: A (2) A country’s current account (a) balance equals the change in its net foreign wealth. (b) balance equals the change in its foreign wealth. (c) surplus equals the change in its foreign wealth. (d)
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shareholder wealth is being maximized subject to limiting factors. Environmental constraints – each country has a different set of environmental rules. Regulatory constraints – each country has its own set of taxes‚ currency convertibility rules‚ and other regulations. Ethical constraints – ethical practices vary across countries. International Business Theories Comparative Advantage Theory – Country specialization can increase overall production
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determination is Two-way process and following are factors that Influence Exchange Rates Floating rates are determined by the market forces of supply and demand. How much demand there is in relation to supply of a currency will determine that currency ’s value in relation to another currency. For example‚ if the demand for U.S. dollars by Europeans increases‚ the supply-demand relationship will cause an increase in price of the U.S. dollar in relation to the euro. There are countless geopolitical and
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manages its currency in relation to other currencies and the foreign exchange market .Thus‚ it is basically the foreign exchange policy of a country or a trading block (such as European Union). There are currently three basic types of exchange rate regimes – Floating Exchange Rate (the market dictates movements in the exchange rate) Pegged Float (where a central bank keeps the rate from deviating too far from a target band or value) Fixed Exchange Rate (ties the currency to another currency (US dollar
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