1. Business English Upper Intermediate U1S09 John Silberstein johnsilb@aol.com

2. Agenda International Marketing: Exchange Rates

3. International Marketing Exchange Rates What do we mean when we speak of exchange rates? The value of one currency in terms of another currency. The U.S. $ is valued (as of 4pm Monday) at $1 =.8175 €.

4. International Marketing Exchange Rates $1 =.8175 € 1 € =.8302 £ $1 =.6787 £

5. International Marketing Exchange Rates Why are foreign exchange rates so important? Simple answer: Any company doing business in a foreign market needs to understand the foreign exchange rate risk.

6. International Marketing Exchange Rates What is the risk in foreign exchange? Exchange rates are remarkably fluid and change not just day-to-day, but minute to minute. A company doing business abroad has to be able to assess the strength or weakness of the foreign exchange rates between their local currency and the currency of the foreign market(s).

7. International Marketing Exchange Rates Small companies who are within the first three levels of selling abroad (Domestic, Intermittent and Export) may avoid exchange rate volatility by simply requiring payment in their own local currency.

8. International Marketing Exchange Rates Volatility: characterized by or subject to rapid or unexpected change

9. International Marketing Exchange Rates Companies from countries with weak currencies may also request payment in the customer’s currency (if it is a strong currency). In fact, the national government (Gov’t) may support this by setting up foreign currency banks.

10. International Marketing Exchange Rates Why would a company or country want to do this? Buying power Store of value

11. International Marketing Exchange Rates Every company that is in the top three levels of International Marketing (International, Multinational and Global) face substantial risk due to exchange rate fluctuations. What are some ways that companies can mitigate exchange rate risks? Mitigate: 1 to cause to become less harsh or hostile 2 to make less severe or painful

12. International Marketing Exchange Rates What are some ways that companies can mitigate exchange rate risks? Spot Transaction Forward Contracts Currency Futures

13. International Marketing Exchange Rates Spot Transaction A foreign exchange transaction in which each party promises to pay a certain amount of currency to the other on the same day or within one or two days.

14. International Marketing Exchange Rates Spot Transaction What is the risk inherent in a spot transaction? Inherent: essential character of something : belonging by nature or habit

15. International Marketing Exchange Rates Forward Contract In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.

16. International Marketing Exchange Rates Forward Contract What is the risk inherent in a forward contract?

17. International Marketing Exchange Rates Currency Futures buying/selling currency in the future at a specified value and date.

18. International Marketing Exchange Rates Square or Squaring Utilitizing Currency Futures to mitigate the risk in a Forward Contract.

19. International Marketing Exchange Rates Currency Futures With a futures contract, you are obligated to purchase a certain value of a currency at a certain rate. Example: You agreed to purchase Euros 100 with US Dollars last year. Last year the €-$ exchange rate was approximately $1.50 for 1€. That means that you would expect to pay $150. If payment were required today, the rate is $1.2284. You would pay approximately $123. This is not a huge difference.

20. International Marketing Exchange Rates Example In 2005 General Electric (GE) contracts to build a nuclear power plant in France, the facility will take 10 years to build. The contract stipulates payment at fixed intervals in Euros every year (on July 1). The total value of the contract is 100,000,000 € and the yearly payment would be 10,000,000 €. On June 20 th 2005 the exchange rate was $1.20 per Euro and the total value of the contract would be $120,000,000,000.

21. International Marketing Exchange Rates The Gov’t of France is paying in Euros, their local currency. General Electric is receiving Euros, not their local currency. As the $ weakens, General Electric profits, relative to the US Dollar, increase. GE is also concerned about purchases of raw materials in Europe, concrete, steel, etc. and will pay for these in Euros. As the value of the Euro weakened, General Electric may have decided to purchase Currency Futures to square its position.

22. International Marketing Exchange Rates Example Coca-Cola Corp. generates a stream of revenue in almost every world currency. Coca-Cola has to decide how to repatriate foreign income to the US.

23. International Marketing Other Macro Economic Terms to know! Inflation: a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services. Recession: a period of reduced economic activity and is usually accompanied by a reduction in some prices as demand drops. During the most recent recession, the pricing of housing and crude oil dropped worldwide due to a large decrease in demand.

24. International Marketing Other Macro Economic Terms to know! Gold Standard: The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. Historically, money was in the form of precious metals, usually Gold and/or silver.

25. International Marketing Other Macro Economic Terms to know! German Hyperinflation of 1923 Hyperinflation: hyperinflation is inflation that is very high or "out of control", a condition in which prices increase rapidly as a currency loses its value. The main cause of hyperinflation is a massive and rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services.

26. International Marketing Writing about the trends displayed in the graph of the value of the USD vs. the Euro