978-0134324838 Chapter 9 Solution Manual Part 2

 9-12. Distinguish the two systems that make up the exchange rate system

today.

Visit MyManagementLab for suggested answers.

(LO 9.3; AACSB: Application of knowledge)

9-13. What is the difference between the international monetary system and the

global financial system?

(LO 9.4; AACSB: Application of knowledge)

■ International monetary system– refers to the institutional framework, rules, and

procedures by which national currencies are exchanged for each other.

■ It includes institutional arrangements that countries put in place to govern exchange

rates.

■ Global financial system– is the collective of financial institutions that facilitate and

regulate investment and capital flows worldwide, such as central banks, commercial

banks, and national stock exchanges.

9-14. What are the key players in the international monetary and financial

systems?

(LO 9.5; AACSB: Application of knowledge)

■ Exhibit 9.4 highlights the major players and the relationships among them. These

players operate at the levels of the firm, the nation, and the world.

■ Key participants:

◘ Firms that acquire large quantities of foreign exchange in the course of

international business- these firms engage in various investment activities abroad that

generate revenues and inject money into the financial system.

◘ The Bank for International Settlements (BIS)

● The BIS ensures that central banks maintain reserve assets and

◘ International Monetary Fund (IMF) is a key international agency that aims to

◘ World Bank – an international agency that provides loans and technical

9-15. What are the aims of the World Bank and the International Monetary Fund?

(LO 9.3; AACSB: Application of knowledge)

■ Bretton Woods created the International Monetary Fund (IMF) and the World

Bank.

■ IMF is an international agency that aims to stabilize currencies by monitoring the

■ World Bank: An international agency that provides loans and technical assistance to

■ The IMF and the World Bank often work together.

Detailed explanation:

International Monetary Fund (IMF)

■ Headquartered in Washington, D.C., the IMF determines the code of behavior for the

■ It promotes international monetary cooperation, exchange rate stability, and

■ Governed by 187 countries, the IMF stands ready to provide financial assistance in

■ Special Drawing Right (SDR)- a special type of international reserve used by central

◘ Example- a central bank might use SDRs to purchase foreign currencies to

◘ Examples– the IMF may recommend that state economic enterprises be

World Bank

■ Originally known as the International Bank for Reconstruction and Development, the

■ World Bank (headquartered in Washington, D.C.) aims to reduce world poverty and

■ World Bank is a specialized agency of the United Nations and has more than 100

■187 member countries are jointly responsible for how the World Bank is financed and

■ Subagencies:

● APPLY YOUR UNDERSTANDING

9-16. Everest Company has been exporting its line of mountain-climbing

equipment to buyers worldwide for 30 years. Top markets Include France,

Norway, Switzerland, India, and Japan. Customers in these countries always pay

in their local currency. Everest’s vice president for international sales often states

that the firm’s biggest day-to-day challenge is dealing with foreign currencies.

Why does he say this? What are the consequences of fluctuating exchange rates

for Everest’s sales revenue and other performance indicators?

(LO 9.1; LO 9.2; AACSB: Analytical Thinking)

■ Fluctuating exchange rates affect both firms and customers.

■ Exhibit 9.2 illustrates some dramatic fluctuations in exchange rates.

Currencies for the countries in this scenario are:

◘ French currency- euro

■ Currency risk –arises from changes in the price of one currency relative to another,

thus complicating cross-border transactions- impacts anyone incurring obligations in

foreign currencies- one of the four types of risks in international business, illustrated in

Exhibit 1.7.

◘ Supplier’s currency appreciates; you may need to hand over a larger amount of

■ Performance Indicators

◘ Higher costs at any point along the value chain reduce profitability and may

■ Examples–

■ Fluctuation Examples–

◘ Indian rupee

●2012– trading at 48 rupees to the U.S. dollar.

Indian perspective

U.S. perspective

● Implications for international business with India:

○ In the span of only 12 months,

◘ Japanese yen

Results:

◘ Euro

◘ Euro appreciation: If the euro/dollar exchange rate goes from one euro

◘ Euro depreciation: If the euro/dollar exchange rate goes from one euro

9-17. Nearly 20 European Union (EU) countries have adopted the euro as their

national currency and are termed the eurozone. Sharing a single currency

eliminates exchange fluctuations and simplifies trade. Eurozone firms had to

make various operational changes, especially regarding finance and accounting,

but generally prefer dealing in the euro. The ECB views the eurozone as one

region and must apply the same monetary policy to all EU members, but this is

problematic at times. The United Kingdom opted not to join the monetary union,

keeping the British pound as its currency. What types of competitive advantages

and disadvantages are associated with the implementation of the euro from the

perspective of the firm? What types of changes did firms make once the euro

became the new currency? Was adopting the euro worth it? Why or why not?

Prior to the adoption of the euro:

■ Firms faced currency and exchange rate fluctuations.

country.

Post euro-adoption:

■ Eliminates exchange fluctuations, and simplifies trade.

Competitive advantages to firms associated with implementing euro:

Firm advantages:

■ A stronger euro helps squeeze inflation by cutting the price of imports, especially oil,

Competitive disadvantages to firm associated with implementing euro:

Firm disadvantages:

■ Euro appreciation harms foreign sales and profits of the EU’s internationally active

firms (exports are more expensive).

■ Possibly both an advantage and disadvantage- A single currency increases

What types of changes did firms make once the euro became the new currency?

Was adopting the euro worth it?

Why or why not?

Worth it? Unification has made Europe stronger

■ The success of the euro as a unifying force in Europe is gradually changing the

international balance of power.

■ The Euro has strengthened political and economic relations throughout Europe.

9-18. Ethical Dilemma:

You are an adviser to a legislator who oversees the banking industry. During the

recent global financial crisis, several banks collapsed and private citizens lost

much money. Problems arose largely due to inadequate or inappropriate

regulation of the banking industry. In recent decades, however, an unrestricted

global banking sector has produced numerous benefits. The relative absence of

restrictions on international financial flows gave firms access to low-cost capital.

The free flow of capital also provided much-needed funding to governments and

entrepreneurs in poor countries. A liberated world currency market greatly

facilitated international trade. Nations benefit enormously from inward capital

flows as portfolio investments. Given the pros and cons of a relatively

unregulated global banking system, how would you advise the legislator? Are

new regulations needed in the banking sector? If so, what types of regulations?

Use the ethical framework in Chapter 4 to help formulate your answer.

A FRAMEWORK FOR MAKING ETHICAL DECISIONS

1. Identify the problem

2. Examine the facts

3. Create alternatives

Evaluate each proposed action to assess its consistency with accepted ethical

standards, using the approaches described earlier:

■ Utilitarian—which action results in the most good and least harm?

4. Implement course of action

5. Evaluate results

1. Identify the problem

This Dilemma:

In the wake of the recent global financial crisis, stricter banking legislation is

being considered. The dilemma is that a market-based banking industry has

produced significant benefits: access to low-cost capital; funding to governments

and entrepreneurs in poor countries; portfolio investments; and liberalized

international trade. The downside to an unregulated banking industry is the

collapse of several banks and private citizens losing much money.

2. Examine the facts

Managers must systematically explore the ethical aspects of each decision the firm may

make, regarding its current and potential activities. Determine the nature and

This Dilemma:

There is risk involved in every investment. Shareholders make money and

sometimes they lose it. That is the nature of the beast. On the other side, banks

made extremely risky investments- sometimes knowingly and sometimes not.

Why is it when banks lost a lot of money during the financial crisis, they were

willing to socialize their losses, and yet when they made money, they privatized

their profits and kept their earnings? Which stakeholder group does a bank have

a primary responsibility to? Are shareholders, employees, taxpayers or

customers disproportionately disadvantaged?

3. Create alternatives

Consistent with the pyramid of ethical behavior, actions should be legal, i.e. it should not

violate host or home country laws or conflict with international treaties. Any proposed

action should be commensurate with company policy, the firm’s code of conduct, and its

code of ethics.

This Dilemma:

What factors should legislators consider regarding the possibility of new banking

regulations?

Utilitarian – which action results in the most good and least harm?

◘ Regulated Banking Industry– Most good for taxpayers and investors- risk is

stabilized, however, returns reflect this

Common Good – which action contributes most to the overall quality of life of

◘ Regulated Banking Industry– Quality of life impacted most for employees,

◘ Free-Market Banking Industry – Quality of life impacted most for employees,

Virtue – which action embodies the character strengths that you value?

◘ Regulated Banking Industry– Social goals dictate actions- character strength

◘ Free-Market Banking Industry – Economic goals dictate actions- no character

4. Implement course of action

Implement your decision.

5. Evaluate results

This Dilemma: Students may use the above-mentioned points as a springboard

for further discussion of whether legislators should mandate new banking

regulations.

● GlobalEDGE™ INTERNET EXERCISES http://globaledge.msu.edu

9-19. There are numerous foreign exchange calculators on the Internet, such as

www.x-rates.com. You can find them via globalEDGE™ or by entering the

keywords “exchange rate” into a Google search. Visit one of these calculators

and compare the exchange rates of various currencies, including the dollar, euro,

yen, and renminbi. What is the rate for these currencies today? What was the

euro–dollar exchange rate one year ago? What factors might have caused the

fluctuation in this rate during the year? Does this Web site provide a way to trade

foreign currencies? What is the amount of commission or other fees charged?

Here we provide a hypothetical answer. Although exchange rates vary, the student’s

answer should be similar to the following.

According to x-rates.com, the exchange rate for the euro is .7019 euro = 1 US dollar; for

the yen, it is 114.65 yen = 1 US dollar. For the Chinese renminbi, the rate quote is 7.5

9-20. Assume that you are a manager at a firm interested in entering Russia. As

part of your initial analysis, top management would like to know about the level of

currency and financial risks associated with the Russian market. Using resources

at globalEDGE™ (globaledge.msu.edu), write a short report on the current status

of these risks, as well as the state of the Russian financial system and historical

exchange rate stability. Based on these findings, what is your recommendation?

Since its transition to a market based economy in the early 1990’s, Russia has had a

managed floating currency policy, which permitted Russia to maintain an artificially

strong ruble for much of the decade that has followed its opening to the West. Russia’s

In recent years, the ruble has been more stable due to the stability of underlying

economic conditions. Strong prices for the resources that are the foundation for the

However, strong economic growth over the same period signals a robust economy that

is rapidly emerging. The attitudes of the Russian government and its potential actions

with respect to the ruble are still a concern. The government has not hesitated to use

The government’s reluctance to address issues associated with inflation might be the

9-21. The International Monetary Fund (IMF) lists its purposes as follows: (1) to

promote international monetary cooperation via consultation and collaboration

on international monetary problems; (2) to facilitate the expansion and balanced

growth of international trade; and (3) to promote exchange stability, to maintain

orderly exchange arrangements among members, and to avoid competitive

exchange depreciation. Visit the IMF Web site (www.imf.org) and list several

examples of how the IMF undertakes and accomplishes these goals. What kinds

of specific actions has the IMF taken over the past year in order to address

economic or financial crises of various nations?

(LO 9.3; LO 9.6; AACSB: Analytical Thinking)

In the recent past, the IMF has taken many actions that have contributed to the spread

of prosperity and trade integration. For example, in the late 1990’s, the world financial

system was threatened by a chain reaction of currency collapses. Beginning in Asia and

spreading to Mexico, South America and Russia, many of the world’s economies were

gravely endangered by currency devaluations that strongly threatened national

economies. The IMF stepped in and helped these countries obtain financing that

permitted their economies to continue functioning. The IMF helped these countries

develop policies and practices that contribute to economic growth and trade expansion.

The IMF routinely advises nations on policies that help to reduce public deficits,

increasing their debt servicing capacity and reducing inflation. Further, it publishes a

wide variety of economic statistics for each IMF member, permitting information about

MyManagementLab

Go to Mymanagementlab.com for Auto-graded writing questions as well as the

following Assisted-graded writing questions:

 9-22. Summarize the four major factors that determine exchange rates.

 9-23. What is the relationship between inflation, interest rates, and currency

values?

 9-24. MyManagementLab Only– comprehensive writing assignment for this

chapter.

Visit MyManagementLab for suggested answers.