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Chapter 7: Dealing with Foreign Exchange
Chapter 7
Dealing with Foreign Exchange
Learning Objectives
After studying this chapter, students will be able to accomplish the following objectives:
1. List the factors that determine foreign exchange rates.
2. Articulate and explain the steps in the evolution of the international monetary
system.
3. Identify strategic responses firms can take to deal with foreign exchange
movements.
4. Identify three things you need to know about currency when doing business
internationally.
Chapter Overview
Chapter 7, Dealing with Foreign Exchange, begins by explaining why the value of
currencies are so important in the global economy. The chapter defines appreciation and
depreciation, and it then turns to discuss the factors that determine foreign exchange
rates, including relative price differences, purchasing power parity, interest rates, money
supply, productivity, balance of payments, exchange rate policies, and investor
psychology. Many important concepts are covered in these sections, including balance of
payments, floating and fixed exchange rate policies, and the bandwagon effect. The
chapter’s second section explores the evolution of the international monetary system from
the gold standard of 1870 to 1914, to the Bretton Woods system of 1944 to 1973, to the
post-Bretton Woods system of 1973 to the present. One of the most enduring legacies of
the Bretton Woods system—the International Monetary Fund is then discussed. Finally,
the chapter looks at strategic monetary responses employed by financial and nonfinancial
companies alike.
Opening Case Discussion Guide
The All-Mighty Dollar
While critics in an influential Economist (2015) report argue that the dominance of the
dollar in the face of fading U.S. economic supremacy is “unsustainable,” its would-be
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Chapter 7: Dealing with Foreign Exchange
contenders are in a worse shape. The newest darling, the yuan, is on the lips of many
bankers from Hong Kong to London. But it is an underachiever.
As early as 1872, the U.S. economy became larger than Britain’s. But it took 70 years
(including two World Wars) for the dollar to displace the pound as the reigning
international currency. So, what are the two lessons from history? First, a country that
does not grow its economy cannot continue to provide adequate liquidity to the global
economy indefinitely. Second, the process will take a very long time.
At present, thanks to the economic weaknesses in the rest of the world and the strengths
of the U.S. economy, the dollar recently enjoyed the rise to a 14-year high against a
basket of six major currencies. In summary, a strong dollar was bad for U.S. growth,
potentially threatening 400,000 jobs. The all-naughty dollar might wash away a lot of
President Donald Trump’s job-creation efforts.
Lesson Plan for Lecture
Brief Outline and Suggested PowerPoint Slides
Learning Objectives PowerPoint Slides
Learning Objectives Overview 2: Learning Outcomes
LO1
List the factors that determine foreign
exchange rates.
3: Foreign Exchange Rate
4: Exhibit 7.3: What Determines Foreign
Exchange Rates?
5: Supply and Demand of Foreign
Exchange
6: Relative Price Differences
7: Interest Rates and Money Supply
8: Productivity and Balance of Payments
9: Exchange Rate Policies
10: Floating Exchange Rate Policy
11: Fixed Rate Policy
12: Investor Psychology
LO2
Articulate and explain the steps in the
evolution of the international monetary
system.
13: History of the International Monetary
System – Eras
14: The Gold Standard (1870–1914)
15: The Bretton Woods System (1944–
1973)
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Chapter 7: Dealing with Foreign Exchange
16: The Post-Bretton Woods System
(1973–Present)
17: International Monetary Fund (IMF)
LO3
Identify strategic responses firms can take
to deal with foreign exchange movements.
18–21: Strategic Responses of Financial
Companies
22: Outcome of Integrated Nature of the
Foreign Exchange Market
23: Strategic Responses for Nonfinancial
Companies
LO4
Identify three things you need to know
about currency when doing business
internationally.
24: Exhibit 7.5: Implications for Action
Debate 25: Debate: International Monetary Fund
(IMF) versus New Development Bank
(NDB) and Asian Infrastructure Investment
Bank (AIIB)
Key Terms 26–27: Key Terms
Summary 28–29: Summary