GLOBAL MARKETING MANAGEMENT

MODULE - 6
DR. ZILLUR RAHMAN
ASSOCIATE PROFESSOR & HEAD
DEPARTMENT OF MANAGEMENT STUDIES, IIT ROORKEE

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 Module 1 & 2: Globalization

Global Marketing Environment

Module 3, 4 & 5: Global Economic Environment Module 8 & 9: Cultural issues and Buying Behavior

Module 6 & 7: Financial Environment Module 10 & 11: Political/ Legal Environment

Development of Competitive Strategy

Module 12 & 13: Global Marketing Research

Module 14 & 15: Global Segmentation and Positioning Module 16 & 17: Global Marketing Strategies

Module 18 & 19: Global Market Entry Mode

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 Global Marketing Strategy Development
Module 20 & 21: Global Product Development Module 26 & 27: Communicating with the world
Module 22 & 23: Marketing Product and Services Consumer
Module 28 & 29: Sales Management

Module 24 & 25: Global Pricing Module 30 & 31: Global Logistic and Distribution
Module 32, 33 & 34: Export/Import Management

Managing Global Operation

Module 35 & 36: Planning, Organization and Control of Global Marketing Operations

Module 37 & 38: Marketing in Emerging Markets

Module 39 & 40: Global Marketing and the Internet

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Financial Environment
MODULE - 6

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 Chapter Overview

1. Historical Role of the U.S. Dollar

2. Development of Today’s International Monetary System
3. Fixed Versus Floating Exchange Rates
4. Foreign Exchange and Foreign Exchange Rates

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 Introduction

• Foreign exchange is the monetary mechanism allowing the transfer

of funds from one nation to another.
• The existing international monetary system always affects
companies as well as individuals whenever they buy or sell products
and services traded across national borders.
• Although international marketers have to operate in a currently
existing international monetary system for international
transactions and settlements, they should understand how the
scope and nature of the system has changed and how it has worked
over time.

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 Introduction

The 1990s – particularly, the second half of the decade – proved to

be one of the most turbulent periods in recent history.
• The adoption of the euro as a common currency in the European
Union in 1999 has challenged the supremacy of the dollar as a
global currency.
• Financial crises in Latin America and the U.S. have reverberated
throughout the world as a global recession.

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 Historical Role of the U.S. Dollar

• The gold standard is a monetary standard that pegs currencies to

gold and guarantees convertibility to gold.
• This standard broke down during the 1930s as countries engaged in
competitive devaluation.
• In the post-World War II period, the United States agreed to
exchange the dollar at $35 per ounce of gold. The dollar became
the common denominator in world trade.
• In the early seventies, the U.S. dollar standard was dropped.

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 Historical Role of the U.S. Dollar

• This system collapsed, primarily due to speculative pressure on the

dollar following a rise in U.S. inflation and a growing U.S. balance-
of-trade deficit.
• This has resulted in exchange rates becoming more volatile and far
less predictable.

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 Development of Today’s International Monetary
System
• Post-World War II developments had long-range effects on
international financial arrangements.
• The negotiations to establish the postwar international monetary
system took place at the resort of Bretton Woods in New
Hampshire in 1944 which established the International Monetary
Fund (IMF).
• The IMF Articles of Agreement were heavily influenced by the
worldwide financial collapse, competitive devaluations, trade wars,
high unemployment and general economic disintegration that
occurred between the two world wars.

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 Development of Today’s International Monetary
System
• The IMF oversees the international monetary system and its
functions are as follows:
 To promote international monetary cooperation.
 To facilitate the expansion and balanced growth of international
trade.
 To promote exchange stability and to maintain orderly
exchange arrangements.
 To assist in the establishment of a multilateral system of
payments in respect to current transactions between member
nations; to eliminate foreign exchange restrictions.
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Development of Today’s International Monetary
System
 To make available the general resources of the fund temporarily
available to members under adequate safeguards; help
members to correct maladjustments in the balance of
payments
 To shorten the duration and lessen the degree of disequilibrium
in the international balance of payments to members
 To help increase international reserves,the IMF created special
drawing rights (SDRs) in 1969.

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 Development of Today’s International Monetary
System
• SDR is an international reserve asset created to supplement
members’ existing reserve assets.

• The value of SDRs is determined by a weighted average of a basket

of four currencies: the U.S. dollar, Japanese yen, European Union’s
euro, and the British pound.

• After the 1997-98 Asian financial crisis, the IMF has worked on
policies to overcome or even prevent future crises.

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 Fixed Versus Floating Exchange Rates

• Fixed Exchange Rate: The values of a set of currencies are fixed

against each other at some mutually agreed on exchange rate.
• After WW II the world’s major industrial nations participated in
a fixed exchange rate system till 1973.
• Floating Exchange Rate:The foreign exchange market (market
forces) determines the relative value of a currency.
• World’s major trading currencies adhere to this system- US
Dollar, Euro, Japanese Yen and British Pound.

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 Fixed Versus Floating Exchange Rates

The case for fixed exchange rates

1) Monetary Discipline: These rates force countries to discipline
themselves and not expand their money supplies at inflationary
rates.
2) Speculation: If the rates are not allowed to float(are fixed) then
speculators cannot buy and sell currencies and cause wild
fluctuations in the exchange rates. i.e. Such a system will limit the
destabilizing effects of speculation.

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 Fixed Versus Floating Exchange Rates

The case for fixed exchange rates

3) Reduce Uncertainty and Risk: Fixed rates help make business
planning easier and reduce the risks associated with exporting,
importing, and foreign investment.

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 Fixed Versus Floating Exchange Rates

The case for floating exchange rates

1) Monetary Policy Autonomy: Floating exchange rate gives countries
autonomy over their own monetary policy.
E.g.: A government facing unemployment could increase its money
supply to stimulate domestic demand and reduce unemployment.
2) Trade Balance Adjustment: Floating rates can help adjust trade
imbalances .
E.g.: A country is importing> exporting, then devaluation can make its
exports cheaper and imports more expensive, leading to correction
in trade deficit.
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 Other Exchange Rate Systems

• Pegged Exchange Rate:The value of a currency is fixed relative to a

reference currency, such as the US dollar, and the exchange rate
between that currency and other currencies is determined by the
reference currency exchange rate.
• E.g.: China pegs its currency to the dollar, then the exchange rate
between Chinese yuan and the euro is determined by the US.
Dollar/ euro exchange rate.

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 Other Exchange Rate Systems

• Dirty Float: It is a float because in theory, the value of the currency

is determined by market forces, but it is dirty float(as opposed to a
clean float) because the central bank of a country will intervene in
the foreign exchange market to try to maintain the value of its
currency if it depreciates too rapidly against an important reference
currency.
• E.g.: Brazil in the early 2000s, which tried to keep its currency, from
depreciating too rapidly against the US dollar.

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 Foreign Exchange and Foreign Exchange Rates

• Foreign Exchange Market: A market for converting the currency of

one country into that of another country.
• Without the foreign exchange market, international trade and
international investment on the scale that we see today would be
impossible.
• It acts as a lubricant that enables companies based in countries that
use different currencies to trade with each other.
• Provides some insurance against foreign exchange risk, which
means the adverse consequences of unpredictable changes in
exchange rates.

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 Foreign Exchange and Foreign Exchange Rates

Foreign Exchange
 It is money denominated in the currency of another nation or
group of nations.
Exchange Rate:
 It is the price of a currency. The number of units of one currency
that buys one unit of another currency.
 The rate at which one currency is converted into another.
 The market in which these transactions take place is termed as
foreign exchange market.

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 Foreign Exchange and Foreign Exchange Rates

• The foreign exchange market has two major segments.

 Over-the-counter market (OTC):It consists of commercial banks,
investment banks and other financial institutions.
 Exchange-traded market:Is composed of securities exchanges
such as Philadelphia Stock Exchange, where certain types of
foreign-exchange instruments, such as futures and options are
traded.

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 Foreign Exchange Instruments

• Several types of foreign-exchange instruments are traded in these

markets.
• Traditional foreign-exchange instruments:
 Spot
 Outright forward
 FX(Currency swaps)

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 Foreign Exchange Instruments

• Spot transactions: Involve the immediate exchange of currency, which is

generally made on the second day after the date on which the two
foreign-exchange dealers agree to the transaction.
 The rate at which the transaction is settled is the spot rate.
• Outright forward transactions: Involve the exchange of currency on a
future date.
 Exchange rates governing such transactions are called forward rate.
 Forward rates are quoted for 30,60,90, and 180 days into the future.

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 Foreign Exchange Instruments

• FX swap :Is the simultaneous purchase and sale of a given amount

of foreign exchange for two different value dates.
 Most often, the first leg of a FX swap is a spot transaction, with
the second leg of the swap a future transaction.
• Derivatives: In addition to the traditional instruments, there are
derivatives, such as:
 Currency swaps; OTC instruments
 Options; traded both OTC and on exchanges
 Future contract; exchange-traded instruments
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 Foreign Exchange Instruments

• Currency swaps:Deal more with interest-bearing financial

instruments(such as a bond), and they involve the exchange of
principal and interest payments.
• Options: Are the right but not the obligation to trade foreign
currency in the future.
• Future contract: Agreement between two parties to buy or sell a
particular currency at a particular time on a particular future date,
as specified in the standardized contract to all participants in that
currency future exchange.

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 Exchange-Rate Determination
• At the most basic level, exchange rates are determined by the demand and supply
of one currency relative to the demand and supply of another.

• E.g.: If demand(for dollar)>supply, and If supply(for yen)>demand, then

the dollar/yen exchange rate will change i.e.
The dollar will appreciate against the yen (or the yen will depreciate against the
dollar).

However, this simple explanation does not tell us what factors underlie the demand
for and supply of a currency.

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 Exchange-Rate Determination
• Purchasing power parity: One of the most fundamental determinants of
exchange rates.
• It links the changes in the exchange rate between two countries’ currencies to
change in the countries’ price level.
• In esence,PPP theory predicts that changes in relative prices will result in a
change in exchange rate.
• Formula for PPP:
(1 + InflBritain)
Rt = R0 * _____________
(1 + InflU.S.)
Where R= the exchange rate quoted in a currency
Infl = Inflation rate
t= time period

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 Exchange-Rate Determination

• E.g.: Assume there is no inflation in US, while prices in Japan are

increasing by 10 percent/year.
Price of a basket of goods US Japan Exchange rate ($/¥)
At the beginning of the year $ 200 $20,000 $1 /¥100
At the end of the year $ 200 ¥22,000 $1 /¥110

• Thus because of inflation, the PPP predicts that the exchange rate
should change.
• Hence Japanese ¥ has depreciated by 10 percent against the $.

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• The “Big Mac Index”: An
interesting illustration of the PPP
theory for estimating exchange
rates is the “Big Mac index” of
currencies used by The Economist
each year.

• Source: ConvergEx Group report “Morning

Markets Briefing”, Aug. 19, 2013

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 Exchange-Rate Determination

• Exchange rates and Interest rates: To understand this

interrelationship between interest rates and exchange rates, we
need to study two key finance theories:
 Fisher Effect
 International Fisher Effect
• Fisher Effect: This theory links inflation and interest rates.
• It states that a country’s “nominal "interest rate (i) is the sum of the
required “real” rate of interest(r) and the expected rate of inflation
over the period for which the funds are to be lent (I).
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 Exchange-Rate Determination

More formally,
i=i=r
r +I+I
Thus, if real rate of interest (r)=5 percent
And annual inflation (I)=10 percent
Then i (nominal interest rate)=15 percent

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 Exchange-Rate Determination

• International Fisher Effect: Explains the link between interest rates

and exchange rates.
• It states that the interest-rate differential is an unbiased predictor
of future changes in the spot exchange rate.
• E.g.: IFE predicts that if nominal interest rates in the US are higher
than those in Japan, the dollar’s value should fall in future by that
interest rate differential, which would be an indication of a
weakening, or depreciation, of the dollar.

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 Exchange-Rate Determination

• Suppose, the interest rate in

US=10 percent and Japan=6 percent

IFE predicts that the value of dollar to depreciate by 4

percent(interest rate differential) against the Japanese yen.

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 Exchange-Rate Determination

• Other factors in Exchange-rate determination: Various other

factors can affect currency values.
 Confidence: In times of turmoil, people prefer to hold currencies
considered safe.
 Technical Factors: Such as the release of national economic statistics,
comments by central bank, seasonal demand for a currency.
 Political Factors: Exchange rate control, election year or leadership
change.
 Random Factors: Unexpected and/or unpredicted events, fear of
uncertainty, etc.

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 References
1) Hill C.W.L and Jain A.K. (2009) International Business, Tata McGraw-Hill.
2) Daniels J.D.,Radebaugh L.H.,Sullivan D.P., and Salwan P. (2013)
International Business, Pearson.
3) Kotabe M. and Helsen K.(2012) Global Marketing
Management,Wiley.

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Thank You

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