Globalization has been one of the most persistent themes in recent history, and this theme applies equally to the world of finance. New investment products, deregulation, worldwide financial system integration, and better communication and information networks have opened new global investment opportunities.
Buying foreign-currency denominated assets means bringing currency risk into the portfolio. Exchange rates are volatile and, at least in the short to medium term, can have a marked impact on investment returns and risks— currency matters.
The portfolio manager will have to balance the advantages and costs of hedging with forward contracts. Foreign-currency options can reduce opportunity costs (they allow the upside potential for favorable foreign-currency movements). However, the upfront option premiums must be paid.
d. The World Bank lends the required amount to the IMF at a low interest rate.
d. For weak currencies, devaluation of up to 10 percent was allowed without any formal approval by the International Monetary Fund.
a. In a fixed exchange rate system, the value of a currency is adjusted according to the day to day market forces.
a. It prints the required currencies, thereby increasing money supply in those countries.
e. The gold standard refers to the use of gold coins as a medium of exchange between countries involved in international trade.
b. Establishing a gold standard seemed impractical as the volume of international trade expanded in the wake of the Industrial Revolution.
c. After the collapse of the Bretton Woods system of floating exchange rates in 1973, the world has operated with a fixed exchange rate system.
The implications for the process of strategy formation are the following: 1) Given the uncertainty explore the implications of a range of possible future trends. 2) Ensure broad participation and informal channels of communication. 3) Encourage the use of multiple sources of information debate and skepticism.
The second implication is that successful management practice is never fully reproducible. In a complex world, neither the most scrupulous practicing manager nor the most rigorous management scholar can be sure of identifying — let alone evaluating – all the necessary ingredients in real examples of successful management practice.
Currency traders, including hedgers, arbitrageurs, and even speculators now are challenged by twenty-four hour global currency trading with markets made for almost any currency.
Currency devaluations are a major cause of global economic chaos, thereby forcing multinational companies, as well as importers and exporters, to make long-term decisions that are undermined by daily trading occurrences.