GlobalBusinessTodayNinthEditionChapter10TheForeignExchangeMarketChapterOutlineOPENINGCASE:EmbraerandtheWildRideoftheBrazilianRealINTRODUCTIONTHEFUNCTIONSOFTHEFOREIGNEXCHANGEMARKETCurrencyConversionInsuringAgainstForeignExchangeRiskManagementFocus:Volkswagen’sHedgingStrategyTHENATUREOFTHEFOREIGNEXCHANGEMARKETECONOMICTHEORIESOFEXCHANGERATEDETERMINATIONPricesandExchangeRatesInterestRatesandExchangeRatesInvestorPsychologyandBandwagonEffectsCountryFocus:QuantitativeEasing,Inflation,andtheValueoftheU.S.DollarSummaryofExchangeRateTheoriesEXCHANGERATEFORECASTINGTheEfficientMarketSchoolTheInefficientMarketSchoolApproachestoForecastingCURRENCYCONVERTIBILITYFOCUSONMANAGERIALIMPLICATIONSForeignExchangerateRiskTransactionExposureTranslationExposureEconomicExposureReducingTranslationandTransactionExposureReducingEconomicExposureOtherStepsforManagingForeignExchangeRiskSUMMARY©2016byMcGraw-HillEducation.Thisisproprietarymaterialsolelyforauthorizedinstructoruse.Notauthorizedforsaleordistributioninanymanner.Thisdocumentmaynotbecopied,scanned,duplicated,forwarded,distributed,orpostedonawebsite,inwholeorpart.185GlobalBusinessTodayNinthEditionChapter10CRITICALTHINKINGANDDISCUSSIONQUESTIONSCLOSINGCASE:TheRise(andFall)oftheJapaneseYenLearningObjectives1.Describethefunctionsoftheforeignexchangemarket.2.Understandwhatismeantbyspotexchangerates.3.Recognizetherolethatforwardexchangeratesplayininsuringagainstforeignexchangerisk.4.Understandthedifferenttheoriesexplaininghowcurrencyexchangeratesaredeterminedandtheirrelativemerits.5.Identifythemeritsofdifferentapproachestowardexchangerateforecasting.6.Compareandcontrastthedifferencesbetweentranslation,transactionandeconomicexposure,andexplainwhatmanagerscandotomanageeachtypeofexposure.ChapterSummaryThischapterfocusesontheforeignexchangemarket.Attheoutset,thechapterexplainshowtheforeignexchangemarketworks.Includedinthisdiscussionisanexplanationofthedifferencebetweenspotexchangeratesandforwardexchangerates.Thenatureoftheforeignexchangemarketisdiscussed,includinganexaminationoftheforcesthatdetermineexchangerates.Inaddition,theauthorprovidesadiscussionofthedegreetowhichitispossibletopredictexchangeratemovements.Othertopicsdiscussedinthechapterincludeexchangerateforecasting,currencyconvertibility,andtheimplicationsofexchangeratemovementsonbusiness.Finally,thechapterconcludeswithadiscussionoftheimplicationsofexchangeratesforbusinesses.Forinstance,itisabsolutelycriticalthatinternationalbusinessesunderstandtheinfluenceofexchangeratesontheprofitabilityoftradeandinvestmentdeals.Adversechangesinexchangeratescanmakeapparentlyprofitabledealsunprofitable.OpeningCase:EmbraerandtheWildRideoftheBrazilianRealSummaryTheopeningcasedescribestheeffortsbyBrazilianaircraftmakerEmbraertolimittheimpactofchangingexchangeratesonitsrevenues.EmbraerisexposedtoexchangeratefluctuationsbecausethecompanypricesitsaircraftinU.S.dollarsandthentranslatesitsrevenuesbackintoBrazilianreals.Thecompanywasnegativelyimpactedinthemid-2002sbytheappreciationofthe©2016byMcGraw-HillEducation.Thisisproprietarymaterialsolelyforauthorizedinstructoruse.Notauthorizedforsaleordistributioninanymanner.Thisdocumentmaynotbecopied,scanned,duplicated,forwarded,distributed,orpostedonawebsite,inwholeorpart.186GlobalBusinessTodayNinthEditionChapter10realversusthedollarandlaterwheneffortstominimizeitsexposurewer...