International Business Chapter 11 Homework Bretton This system actually helped the country recover from its financial crisis in 2008

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2. How would you characterize the financial crisis in Iceland in 2008? Was it a currency crisis, a

banking crisis, or a foreign debt crisis? Explain your response.

Lecture Note: To extend this case discussion, consider https://www.ft.com/content/ea3dbe58-

097e-11e7-97d1-5e720a26771b, https://www.bloomberg.com/opinion/articles/2018-09–

25/iceland-found-another-way-to-clean-up-a-financial-crisis, and

https://www.brookings.edu/wp-content/uploads/2018/02/benediktsdottirtextfa17bpea.pdf.

E) The causes of the financial crisis that erupted across Southeast Asia during the fall of 1997

were sown in the previous decade when these countries were experiencing unprecedented

growth.

F) Huge increases in exports, and hence the incoming funds, helped fuel a boom in commercial

and residential property, industrial assets, and infrastructure. As the volume of investments

ballooned during the 1990s, often at the bequest of national governments, the quality of many of

these investments declined significantly.

G) Investments made on the basis of unrealistic projections about future demand conditions

created significant excess capacity. These investments were often supported by dollar-based

debts. When inflation and increasing imports put pressure on the currencies, the resulting

devaluations led to default on dollar-denominated debts. A final complicating factor was that by

the mid-1990s although exports were still expanding across the region, so were imports.

H) The Asian meltdown began in mid-1997 in Thailand when it became clear that several key

Thai financial institutions were on the verge of default. Following the devaluation of the Thai

Baht, wave after wave of speculation hit other Asian countries. These devaluations were largely

driven by similar factors to those that underlay the earlier devaluation of the Thai Baht. A

combination of excess investment, high borrowings, much of it in dollar-denominated debt, and a

deteriorating balance of payments position.

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EVALUATING THE IMF’S POLICY PRESCRIPTIONS

I) By 2016, the IMF had programs in more than 30 countries that were struggling with economic

and currency crises. All IMF loan packages come with conditions attached, generally a

combination of tight macroeconomic policy and tight monetary policy.

Teaching Tip: To explore current issues at the International Monetary Fund in more depth, go to

http://www.imf.org.

Inappropriate Policies

J) The IMF’s policies have recently come under fire. One criticism is that the IMF’s “one-size-

fits–all” approach to macroeconomic policy is inappropriate for many countries.

Lecture Note: To extend this discussion, consider

https://www.theguardian.com/business/2016/oct/09/the-world-bank-and-the-imf-wont-admit-

their-policies-are-the-problem.

Moral Hazard

K) A second criticism of the IMF is that its rescue efforts are exacerbating a problem known to

economists as moral hazard. Moral hazard arises when people behave recklessly because they

know they will be saved if things go wrong.

Lecture Note: To extend this discussion, consider https://www.huffingtonpost.com/sharan-

burrow/do-the-imfs-actions-worse_b_9670470.html and

https://www.forbes.com/sites/francescoppola/2018/10/28/the-imf-has-learned-nothing-from-the-

greek-crisis/#1f2f0f2e6f3c.

Lack of Accountability

L) The final criticism of the IMF is that it has become too powerful for an institution that lacks

any real mechanism for accountability.

Observations

M) As with many debates about international economics, it is not clear which side has the

winning hand about the appropriateness of IMF policies.

FOCUS ON MANAGERIAL IMPLICATIONS

Currency Management, Business Strategy, and Government

Relations

A) The managerial implications of the material discussed in this chapter fall into three main

areas: currency management, business strategy, and corporate-government relations.

Currency Management

B) An obvious implication with regard to currency management is that companies must

recognize that the foreign exchange market does not work quite as depicted in Chapter 10. The

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current system is a managed-float system in which government intervention can help drive the

foreign exchange market. Companies need to be aware of this and adjust their foreign exchange

transactions accordingly.

C) A second message contained in this chapter is that under the present system, speculative

buying and selling of currencies can create volatile movements in exchange rates.

Business Strategy

D) The volatility of the present floating exchange rate regime presents a conundrum for

international businesses. Exchange rate movements are difficult to predict, and their movement

can have a major impact on the competitive position of businesses. One response to the

uncertainty that arises from a floating exchange rate regime might be to build strategic flexibility

to minimize the economic exposure of the firm.

management FOCUS: Airbus and the Euro

Summary

This feature describes how Airbus is protecting itself from exchange rate fluctuations. French

aircraft maker Airbus prices its planes in dollars. However, because over half the company’s

costs are in euros, the company has the potential to see significant fluctuations in its earnings if it

does not hedge its foreign exchange exposure. The following questions can help in the discussion

of the feature.

Discussion Questions

1. What type of foreign exchange exposure does Airbus face? How can Airbus protect itself from

its exposure to changing exchange rates? How does the company’s switch to more U.S. suppliers

help the company?

2. Airbus has asked its European-based suppliers to start pricing in U.S. dollars. What does

Airbus hope to gain by this request? What does it mean for suppliers?

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Teaching Tip: Students can learn more about Airbus by going to the company’s website at

http://www.airbus.com/en.

Lecture Note: To extend the discussion about Airbus, consider

https://www.bloomberg.com/gadfly/articles/2016-10-03/airbus-investors-should-be-patient-as–

poised-to-outperform-boeing and http://www.bloomberg.com/news/articles/2016-01-20/airbus-

delivers-its-new-plane-almost-no-one-notices.

Corporate-Government Relations

E) As major players in the international trade and investment environment, businesses can

influence government policy towards the international monetary system. International businesses

should use their influence to promote policy decisions that facilitate the growth of international

trade and investment.

CONNECT

Video Case

Air-Omnibus and the Euro

Summary

This activity focuses on the international monetary system and the impact of fluctuating

exchange rates on corporate profits. Companies can take several steps to protect themselves from

exchange rate exposure.

Activity

Students are asked to watch a video on exchange rates and then respond to a series of questions

related to the video.

Class Discussion

International managers need to be aware of the effect of changing exchange rates on corporate

profits and the steps they can take to hedge the risk associated with exchange rate exposure.

Discuss how companies can protect themselves against adverse exchange rate movements.

CONNECT

Case Analysis

A Business’s Strategic Choice

Summary

This activity focuses on the international monetary system and the choices that businesses make

within that context. Firms should be aware of the risks involved with exchange rates as they

make strategic choices.

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Activity

Students are asked to read a short case on exchange rates and then respond to a series of

questions related to the case.

Class Discussion

Understanding the impact of fluctuating exchange rates on a business is important for

international managers. Companies must assess exchange rate risk as they make strategic

decisions. Discuss how companies can assess their exposure to changing exchange rates.

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End-of-Chapter Resources

Critical Thinking and Discussion Questions

1. Why did the gold standard collapse? Is there a case for returning to some type of gold

standard? What is it?

2. What opportunities might current IMF lending policies to developing nations create for

international businesses? What threats might they create?

3. Do you think the standard IMF policy prescriptions of tight monetary policy and reduced

government spending are always appropriate for developing nations experiencing a currency

crisis? How might the IMF change its approach? What would the implications be for

international businesses?

4. Debate the relative merits of fixed and floating exchange rate regimes. From the perspective of

an international business, what are the most important criteria in a choice between the systems?

Which system is the more desirable for an international business?

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5. Imagine that Canada, the United States, and Mexico decide to adopt a fixed exchange rate

system. What would be the likely consequences of such a system for (a) international businesses

and (b) the flow of trade and investment among the three countries?

6. Reread the Country Focus “The IMF and Iceland’s Economic Recovery,” and then answer the

following questions:

a. What were the main causes of Iceland’s economic troubles in 2008?

b. Was Iceland facing a classic currency crisis, or was this a banking crisis?

c. How did Iceland recover from its 2008–2009 crisis? What are the important lessons to

draw from this case?

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d. Iceland did not implement the austerity policies that are so often associated with IMF

loans, and yet the economy recovered. Does this suggest that austerity policies do not

work?

7. Reread the Country Focus “China’s Exchange Rate Regime,” and then answer the following

questions:

a. Why do you think that the Chinese historically pegged the value of the yuan to the U.S.

dollar?

b. Why did the Chinese move to a managed-float system in 2005?

c. What are the benefits that China might gain by allowing the yuan to float freely against

other major currencies such as the U.S. dollar and the euro? What are the risks? What do

you think they should do?

d. Is there any evidence that the Chinese kept the level of their currency artificially low in

the past to boost exports? Is China keeping it artificially low today?

e. What policy stance should the United States and the EU adopt toward China with regard

to how it manages the value of its currency?

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Lecture Note: To extend the discussion on China’s policy toward its currency, consider

https://www.nytimes.com/2017/04/11/business/economy/trump-china-currency-manipulation-

trade.html and https://www.cnbc.com/2017/03/15/china-currency-manipulator-claims-are-false-

sp-global-ratings.html.

globalEDGE™ Research Task

Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text.

Exercise 1

Search phrase: Global Financial Stability Report

Resource Name: IMF: Global Financial Stability Report

Website: http://www.imf.org/external/pubs/ft/GFSR/index.htm

globalEDGE™ Category: Finance

Additional Info:

The report is published semi-annually by the Capital Markets Division of the International

Monetary Fund and examines current risks facing the global financial system and policy actions

that may mitigate these. As a result, it provides a great overview of the state of the global

financial system.

Exercise 2

Search phrase: Deutsche Bank Research

Resource Name: Deutsche Bank Research

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Website: http://www.dbresearch.com

globalEDGE™ Category: Finance

Additional Info:

A research focused website published by the Deutsche Bank provides timely analysis of the

international finance markets. A special section dedicated to Emerging Markets can be reached

under the “Research” section of the main navigation.

Egypt and the IMF

closing case

Summary

The closing case explores the economic crisis in Egypt that ultimately forced the country to

request a loan from the IMF. Egypt’s president, Abdel Fatah al-Sissi, came to power in 2013

amid growing economic problems, one of which was a growing shortage of foreign currency

necessary to buy basic commodities. By 2016, the situation had reached a crisis point and Egypt

appealed to the IMF for a loan. The IMF complied with the request, but in return, demanded that

Egypt adopt a series of austerity measures designed to get the country’s economy back on track.

Case Discussion Questions

1. What was the root cause of Egypt’s economic problems?

2. Was it appropriate for Egypt to bring in the IMF? What other alternatives did they have?

3. Do you think that the policy measures required by the IMF are appropriate? What are these

policy measures designed to do? What might be the unintended consequences of these measures?

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4. As a potential foreign investor, at what point would you be willing to invest in the Egyptian

economy? To what extent would policies imposed by the IMF influence your decision?

Lecture Note: To extend this case discussion, consider

https://www.newsweek.com/2017/03/10/egypts-economy-crisis-government-spending-millions-

new-space-agency-561743.html and

https://www.nytimes.com/2016/03/11/world/middleeast/egypt-economic-crisis-abdel-fattah-el–

sisi.html.

Video Note: Egypt’s finance minister has commented on the state of the economy in Egypt and

uncertainty in the region. To learn more, go to https://www.cnbc.com/video/2018/09/05/egypts-

finance-minister-on-the-domestic-economy-and-the-emerging-market-crisis.html.

CONNECT

Geography

Summary

This activity is designed to test the student’s knowledge of geography. Questions related to

chapter material are asked, requiring students to understand the topics and the locations of the

countries involved.

Activity

Students are asked to respond to a series of question related to the geographic location of several

countries.

Class Discussion

Understanding the geographic location of countries is essential to the understanding of

international business. Ask students to discuss the implications of the geographic locations of the

countries in this exercise on the subject matter.

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Continuous Case Concept

China is currently a hot market for automakers. Companies see the market as being one of the

world’s most significant markets in the next decade and are shifting production to China. Some

companies are even developing cars specifically for the local market. However, pressure on

China to revalue its currency could change the nature of the market.

• In June 2010, the Chinese government indicated that the Yuan would be more flexible

and allowed to appreciate in value relative to other currencies. Ask students to consider

the strategic implications of a stronger Yuan for the auto companies. Do any of the

companies benefit from a stronger Yuan? Do consumers?

• Next, ask students to consider the effects a floating Yuan might have on the industry. Is it

beneficial for companies producing in China? Why or why not?

• Finally, if China moves to a floating regime, should the auto companies move their

production from other locations in the world to China? Why or why not?

This feature can be used at the beginning of the discussion of the international monetary system.

The feature also works well as a conclusion to the material presented in the chapter and can help

students understand the opportunities and threats for companies related to exchange rate

movements.

Global Business Today Eleventh Edition Chapter 11

Additional Readings and Sources of Information

The Strange Worry Over China Devaluing the Yuan

https://www.adamsmith.org/blog/the-strange-worry-over-china-devaluing-the-yuan

Risk of Chinese Currency Devaluation Rises With Latest Tariffs Threat

https://www.wsj.com/articles/risk-of-chinese-currency-devaluation-rises-with-latest-tariffs-

threat-1529431116

Venezuela Central Bank Is Preparing Fresh Data for the IMF

https://www.bloomberg.com/news/articles/2018-11-15/venezuela-central-bank-is-said-to–

prepare-updated-data-for-imf

IMF’s Lagarde says central banks could issue digital money

https://www.bbc.com/news/business-46203869

Strengthening the International Monetary System

https://www.imf.org/en/News/Articles/2017/03/08/SP030817-Strengthening-the-International-

Monetary-System

Creation of the Bretton Woods System

https://www.federalreservehistory.org/essays/bretton_woods_created