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Global Business Today Eleventh Edition Chapter 10
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Did You Know Video Clip
The video clip asks: “Did you know that the US dollar has been one of the strongest currencies in
the world since the Great Recession of 2008–2009?”
1. What does a “strong” U.S. dollar mean, in simple terms?
2. What is a main reason for the strong U.S. dollar?
3. Why might this be good for U.S. importers? Why might it be less good for U.S. exporters?
How will your “strong dollars” perform if you travel to Europe this summer?
Global Business Today Eleventh Edition Chapter 10
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APPROACHES TO FORECASTING
D) Two approaches to forecasting exchange rates are fundamental analysis and technical
analysis.
Summary
This activity focuses on fluctuations in currency values and specifically on predicting exchange
rate movements. Movements in exchange rates can affect the short- and long-term profitability of
a firm, its opportunities to export, individual transactions, and the overall competitiveness of the
firm.
This activity focuses on understanding exchange rate movements and the implications of those
movements for organizations. Exchange rate forecasting services can help firms predict
exchange rate movements, although none are accurate in all situations.
Activity
Students are asked to read a short case on exchange rates and then respond to a series of
Global Business Today Eleventh Edition Chapter 10
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Class Discussion
Understanding exchange rate movements is essential for managers conducting business across
borders. Managers can use various forecasting services to better understand where exchange
C) Free convertibility is the norm in the world today, although many countries impose some
restrictions on the amount of money that can be converted. The main reason to limit
convertibility is to preserve foreign exchange reserves and prevent capital flight (when residents
and nonresidents rush to convert their holdings of domestic currency into a foreign currency).
D) Countertrade refers to a range of barter-like agreements by which goods and services can be
Transaction Exposure
B) Transaction exposure is the extent to which the income from individual transactions is
affected by fluctuations in foreign exchange values.
Translation Exposure
C) Translation exposure is the impact of currency exchange rate changes on the reported
Global Business Today Eleventh Edition Chapter 10
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Economic Exposure
D) Economic exposure is the extent to which a firm’s future international earning power is
affected by changes in exchange rates. Economic exposure is concerned with the long-term
2) firms should distinguish between transaction and translation exposure on the one hand, and
economic exposure on the other hand; 3) the need to forecast future exchange rates cannot be
overstated; 4) firms need to establish good reporting systems so the central finance function can
regularly monitor the firm’s exposure position; and 5) the firm should produce monthly foreign
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1. The interest rate on South Korean government securities with one-year maturity is 4 percent,
and the expected inflation rate for the coming year is 2 percent. The interest rate on U.S.
government securities with one-year maturity is 7 percent and the expected rate of inflation is 5
percent. The current spot exchange rate for Korea won is $1 = W1,200. Forecast the spot
exchange rate one year from today. Explain the logic of your answer.
2. Two countries, Great Britain and the United States, produce just one good: beef. Suppose the
price of beef in the U.S. is $2.80 per pound, and in Britain it is £3.70 per pound.
a. According to PPP theory, what should the $/£ spot exchange rate be?
b. Suppose the price of beef is expected to rise to $3.10 in the United States, and to £4.65 in
Britain. What should the one-year forward dollar/pound exchange rate be?
c. Given your answers to parts a and b, and given that the current interest rate in the United
States is 10 percent, what would you expect the current interest rate to be in Britain?
or 0.67$/£.
c. Since the dollar is appreciating relative to the pound, and given the relationship of
3. Reread the Management Focus “Embraer and the Gyrations of the Brazilian Real,” and then
answer the following questions:
a. What does the recent economic history of Brazil tell you about the relationship between
price inflation and exchange rates? What other factors might determine exchange rates
for the Brazilian real?
b. Is a decline in value of the real against the U.S. dollar good for Embraer, bad for
Embraer, or a mixed bag? Explain your answer.
c. What kind of foreign exchange risks is Embraer exposed to? Can Embraer reduce these
risks? How?
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e. Since 2008, Embraer has significantly reduced its dollar hedging operations. Is this wise?
f. Between mid-2014 and early 2015, the real depreciated significantly against the U.S.
dollar. What do you think the impact was on Embraer?
4. You manufacture wine goblets. In mid-June, you receive an order for 10,000 goblets from
Japan. Payment of ¥400,000 is due in mid-December. You expect the yen to rise from its present
rate of $1 = ¥130 to $1 = ¥100 by December. You can borrow yen at 6 percent a year. What
should you do?
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5. You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures
component parts for your U.S. assembly operations. The subsidiary has been financed by bank
borrowings in the United States. One of your analysts told you that the Mexican peso is expected
to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year.
What actions, if any, should you take?
Exercise 1
Search phrase: currency exchange
Resource Name: XE: Currency and Foreign Exchange
Exercise 2
Search phrase: fx street
Resource Name: FX Street
Global Business Today Eleventh Edition Chapter 10
The Mexican Peso, the Japanese Yen, and Pokemon Go
1. Why are most trades between the Japanese yen and the Mexican peso made through U.S.
dollars?
2. Explain why the peso fell in value against the Japanese yen during 2016. How predictable was
this fall?
3. What were the benefits of the fall in the value of the peso against the yen for Mexican
companies? What were the costs?
4. What were the benefits of the fall in the value of the peso against the yen for Japanese
companies? What were the costs?
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Continuous Case Concept
As the world’s automakers search around the globe for the best suppliers for their parts, and at
the same time, focus on new markets such as China and India, controlling for changes in
exchange rates becomes an important part of their financial strategies.
• Ask students to identify the types of exposure to foreign exchange rates automakers are
likely to encounter.
• Then, ask students to develop a plan for controlling for the exposure. Discuss why a
company might choose one hedging strategy over another. For example, Subaru is
expanding its presence in the United States to capitalize on greater access to the U.S.
market and the potential of a weaker dollar in the future. The company has also benefited
from its hedging strategy to control for exposure to currency movements. Several
automakers including Honda, Nissan, and Toyota have struggled with a strong yen which
has limited their ability to expand globally.
• Finally, ask students to consider what exchange rates mean to companies that draw a
significant percentage of their revenues from foreign countries. How do the strategies of
these companies differ from those of companies that can rely on their domestic market
for the majority of their sales?
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Additional Readings and Sources of Information
What the Decline of the Dollar Means
https://www.nytimes.com/2017/07/20/business/dealbook/what-the-decline-of-the-dollar-
means.html
Signs point to the Japanese yen getting even stronger as the U.S. dollar weakens
https://www.cnbc.com/2018/02/27/japanese-yen-may-strengthen-as-dollar-weakens-morgan-
stanley-and-ing.html
Japan Government Calls for Stable FX, Seeks to Jawbone Strong Yen
https://money.usnews.com/investing/news/articles/2018-02-13/japan-government-calls-for-
stable-fx-seeks-to-jawbone-strong-yen
Foreign Exchange Risk
https://www.export.gov/article?id=Trade-Finance-Guide-Chapter-14-Foreign-Exchange-FX-
Risk-Management
New iPhones: Why Is Apple pricing the same in pounds and dollars?
