International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
Module 8: The International Monetary System and
Financial Forces
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YOUR CONTENT
Summary
Learning Objectives
Key Terms & Key Terms with Definitions
Content Outline
CONNECT TOOLS FOR CLASS P R EPARATION
SmartBook
What is SmartBook?
How Does SmartBook Help You/Students?
How to assign SmartBook to ensure students come to class prepared?
ENGAG EMENT & APPLICATION (FACE TO FACE & ONLINE & HYBRID)
BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS
IB IN PRACTICE
GLOBAL DEBATE
GET THAT JOB! FROM BACKPACK TO BRIEFCASE
Critical Thinking Questions
Global Edge Research Task
MiniCase
Bonus Activities
Video Suggestions
Team Exercises
Supplemental Lecture
Tools & Tricks
Controversial Issues
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Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
Teaching Suggestions
CONNECT TOOLS FOR ASSESSEMENT OF LEARNING
Interactive Applications
Assigning Interactives
Time-Saving Hints:
Connect Content Matrix
YOUR CONTENT
SUMMARY
This chapter reviews the international monetary system, how it developed, today’s system,
exchange rate movements, the financial forces that governments can exert and with which
managers must contend, and the significance of balance of payments.
LEARNING OBJECTIVES
LO 8-1 Describe the international monetary system’s history.
LO 8-2 Describe today’s floating currency exchange rate system, including the IMF
currency arrangements.
LO 8-3 Describe the factors that influence exchange rate movement.
LO 8-4 Discuss financial forces governments can exert.
LO 8-5 Explain the significance of the balance of payments to international business
decisions
KEY TERMS AND DEFINITIONS
arbitrage (p. 219)
The process of buying and selling instantaneously to make
profit with no risk
ask price (p. 218)
Lowest-priced sell order currently in the market
balance of payments (p. 226)
Record of a country’s transactions with the rest of the world
Bank for International
Settlements (BIS) (p. 215)
Institution for central bankers; operates to build cooperation
in order to foster monetary and financial stability
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
bid price (p. 218)
Highest-priced buy order currently in the market
Bretton Woods System (p. 211)
The international monetary system in place from 1945 to
1971, with par value based on gold and the U.S. dollar
efficient market approach
(p. 220)
Assumption that current market prices fully reflect all
available relevant information
fiscal policies (p. 219)
Policies that address the collecting and spending of money
by the government
Fischer effect (p. 219)
The relationship between real and nominal interest rates:
The real interest rate will be the nominal interest rate minus
the expected rate of inflation
fixed exchange rate (p. 211)
Exchange rate regime in which the currency’s value is tied to
the value of another currency or gold
floating exchange rates (p. 212)
Exchange rates determined by supply and demand that allow
currency values to float against one another
forward currency market (p. 218)
Trading market for currency contracts deliverable 30, 60, 90,
or 180 days in the future
forward rate (p. 218)
The exchange rate between two currencies for delivery in
the future, usually 30, 60, 90, or 180 days
fundamental approach (p. 220)
Exchange rate prediction based on econometric models that
attempt to capture the variables and their correct
relationships
gold standard (p. 210)
A monetary system that defines the value of its currency in
terms of a fixed amount of gold
international Fischer effect
(p. 219)
Concept that the interest rate differentials for any two
currencies will reflect the expected change in their exchange
rates
intervention currency (p. 217)
A currency used by a country to intervene in the foreign
currency exchange markets
Jamaica Agreement (p. 213)
The 1976 IMF agreement establishing flexible exchange rates
among IMF members
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Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
law of one price (p. 219)
Concept that in an efficient market, like products will have
like prices
monetary policies (p. 219)
Government policies that control the amount of money in
circulation and its growth rate
par value (p. 211)
Stated value
purchasing power parity (PPP)
(p. 219)
The amount of adjustment that must be made in the
exchange rates for two currencies in order for them to have
equivalent purchasing power
random walk hypothesis
(p. 220)
Assumption that the unpredictability of factors suggests that
the best predictor of tomorrow’s prices is today’s prices
reciprocal currency (p. 218)
In FX, using the dollar as the base currency, a currency that is
quoted as dollars per unit of currency instead of in units
ofcurrency per dollar
reserves (p. 211)
Assets held by nation’s central bank, used to back up
government liabilities
Special Drawing Rights (SDR)
(p. 211)
An international reserve asset established by the IMF; the
unit of account for the IMF and other international
organizations
spot rate (p. 218)
The exchange rate between two currencies for delivery
within two business days
technical analysis (p. 220)
An approach that analyzes data for trends and then projects
these trends forward
Triffin paradox (p. 211)
A problem in which a national currency that is also a reserve
currency will eventually run a deficit, leading to lack of
confidence in the reserve currency and a financial crisis
vehicle currency (p. 217)
A currency used as a vehicle for international trade or
investments
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
C O N T E N T O U T L I N E
The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY
TERMS learners will need to take away from the course and a notation of when to use POWERPOINT
SLIDES with LECTURE NOTES to drive home teaching points.
LO
8-1
Describe the international monetary system’s history.
• The gold standard
• The Bretton Woods system
• Evolution
• Fixed
• Issues with system (Triffin paradox): reserve
nation’s deficit leads to lack of confidence
• Central reserve/National currency conflict
Key Terms:
• gold standard
• Bretton Woods
• fixed exchange arte
• par value
• reserves
• Triffin paradox
• special drawing rights
(SDRs)
Lecture Outline and Notes:
The gold standard
Established in Britain 1717, Newton, from silver standard
Simplicity is at core of its appeal
Government does not have monetary flexibility
The Bretton Woods meeting and system
Allies set up monetary systems at end of WWII, incl. IMF and World Bank
Fixed rate exchange system, with gold-backed U.S. dollar as standard
Supported trade growth into 60ies, but growing international trade required a more
flexible system.
Triffin paradox—U.S. deficit due to dollar’s use as reserve currency
SDR as an intermediary currency
Central reserve/national currency conflict
Reserve currency effects national currency, leading to deficit
SDR a way to avoid this result
LO 8-2
Describe today’s floating currency exchange rate system,
including the IMF currency arrangements.
• U.S. stopped the exchange of gold for dollars
• floating rate system emerged, values set by supply and
Key Terms:
• floating exchange rates
• Jamaica Agreement
• Bank for International
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
demand (Jamaica Agreement formalized in 1976)
• current arrangements as outlined by IMF
• Bank for International Settlements mediates
Settlements
U.S. left the gold system in response to growing deficit
Free floating system emerged (Jamaica Agreement)
IMF recognizes 8 arrangements, vary in degree of flexibility
Have no currency and use the currency of another nation
Peg currency to value of another currency
Manage a floating currency
Maintain a freely floating currency
Bank for International Settlements (BIS)
Operates as intermediary
Central bankers’ central bank
LO 8-3
Describe the factors that influence exchange rate movement
• Why foreign exchange (FX) occurs
• FX market
o reciprocal
o spot
o forward
o bid and ask
o Parity relationships
interest rate parity(Fischer effect)
o random walk hypothesis
o fundamental
Key Terms:
• vehicle currency
• intervention currency
• reciprocal currency
• spot rate
• forward currency
market
• forward rate
• fiscal policies
• law of one price
• arbitrage
• purchasing power
parity (PPP)
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
o technical
approach
• random walk
hypothesis
• fundamental
approach
• technical analysis
Why FX occurs
Buyers want to purchase in own currency, so sellers assume risk as part of their offering
Risk of movement may be substantial, as freely floating currencies can shift considerably
The FX market
Reciprocal is a currency that is quoted as dollars per unit (using dollar as base currency) of
currency instead of in units of currency per dollar
Spot rate is rate for exchange within two business days
Forward rate is for a contract deliverable in a specified time in the future (30, 60, 90 days)
Bid is highest-priced buy order, while ask is lowest-priced sell order
What causes FX movement
Many variables—inflation, supply and demand, productivity, labor costs, political situation,
inflation, the Fischer effect
2. International application: the interest rate differentials for any two currencies will
reflect the expected change in their exchange rates.
3. Purchasing Power Parity (PPP), an application of the law of one price: currency
exchange rates between two currencies should equal the ratio of the price levels of
their commodity baskets (The Economist’s Big Mac Index)
Exchange rate forecasting
Efficient market approach: assumption that current market prices reflect all available
information
Random Walk Approach: assumption that the unpredictability of the factors that influence
exchange rates suggests that the best predictor of tomorrow’s prices are today’s prices
Fundamental approach: prediction based on economic models that attempt to capture the
variables and their correct relationships
Technical analysis: approach analyzes data and projects these trends forward
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
8 Instructor’s Manual – Module 8 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
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LO 8-
4
Discuss the financial forces governments can exert.
• Currency exchange controls
o limit of amount of currency that can be exchanged
o Convertible or nonconvertible
o Government controls exchange rates
• Taxation
o firms seek lower taxes
o income, value-added and withholding
o techniques involve profit shifting (often via
transfer pricing) and inversion
• Inflation and interest rates
o Inflated currencies tend to weaken
o May lead to balance of payments deficits in trade
account
Key Terms:
Currency exchange controls
Governments can control currency exchange of their currency and other currencies within
their borders
Convertible and nonconvertible currencies
Motivation is to manage foreign reserves
With currency controls, exchange rates usually above open market rates
Taxation—financial as well as legal force
credited back on earlier payments
3. Withholding tax—indirect tax on passive income
Management techniques involve profit shifting (often through transfer pricing) and
inversion (moving to a lower-tax environment)
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
Inflated currencies tend to weaken
Interest rates rise with inflation
LO 8-5
Explain the significance of the balance of payments to
international business decisions
• Record of a country’s transactions with the rest of
the world
• Reveal demand for country’s currency
• Currency flows tracked in double-entry bookkeeping
form
• Deficit in current account may signal inflation. low
productivity, inadequate saving
• Must look at capital account as well to give
meaning. Ex. US has run current account deficits
matched with capital account surpluses. (May
suggest foreigners’ desire to hold dollars for FDI)
Key Terms:
• balance of payments
Balance of Payments is a record of a country’s transactions with the rest of the world.
What balance of payments shows
Flows of capital in and out of country
Demand for the currency, hence a comparison of imports (flows out) and exports (flows in)
Tracked in double-entry bookkeeping form
Each international exchange of assets is recorded with a debit (outward flows of funds)and
credit side (inward flows of funds)
Three major accounts:
1. Current account tracks a. goods –tangibles, known as trade balance, services-
3. Official reserves—gold imports and exports
What deficits and surpluses can mean
1. Current account deficit may mean economic problems (inflation, low productivity,
inadequate savings) OR that demand into the country (Treasury bills, investment
property) exceeds outward flows (as in U.S.)
2. To give meaning to a deficit, you need to look at total picture.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 8
CONNECT TOOLS FOR CLASS PREPARATION
SmartBook
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textbook, but unlike a typical eBook, SmartBook actively tailors that content to your individual needs
as a student. SmartBook can be accessed online through your laptop, tablet or smartphone and is also
accessible when you’re offline!
How Does SmartBook Help You/Students?
• Assignable – assigning students their reading and studying their textbook content
ensures they are coming to class prepared.
• Proven to help students get a better grade. Studies show SmartBook technology can help
increase grades by a full letter.
• Save time. Study smarter. SmartBook makes sure students focus on the things you don’t
know so they can prioritize your study time wisely.
• No more cramming. SmartBook helps learners retain key concepts so you can learn—not
memorize.
• Accessible on the go. Use SmartBook on your laptop, tablet or smartphone–online or
offline–via your browser or mobile app.
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or finals. Know how well you understand the material now.
How to assign SmartBook to ensure students come to class prepared?
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