CHAPTER 6:

FINANCIAL FORCES
(Business Incident, Fluctuating Currency
Values, and Foreign Exchange Quotations)

Submitted By: Submited To:

LUARCA, Christine Joy A. Prof. David
BSBA- Marketing and Management Saturday 1:30-4:30PM
International Business
Business Incident

In 1984, after the US dollar ($) had increased in value against the Japanese Yen in an almost
uninterrupted raise since 1981, many experts, including currency traders, thought that the US dollar had
peaked. Expecting the dollars far value to fall, the chief trader of Fuji Banks New York money-dealing
operating arranged to sell (short) large amounts of dollars for future delivery, betting that he would earn a
huge profit when he purchased the lower-cost dollars for many fewer Japanese yen on the delivery rate.
He lost the bet. Instead of going down, the US dollar continued to go up, ahd he lost $48 million
for Fuji over a four month period.

Fluctuation Currency Values

A change in an exchange rate.

A currency has value, or worth, in relation to other currencies, and those values change
constantly.
For example, if demand for a particular currency is high because investors want to invest in that
country's stock market or buy exports, the price of its currency will increase. Just the opposite will happen
if that country suffers an economic slowdown, or investors lose confidence in its markets.
While some currencies fluctuate freely against each other, such as the Japanese yen and the US
dollar, others are pegged, or linked. They may be pegged to the value of another currency, such as the US
dollar or the euro, or to a basket, or weighted average, of currencies.

Foreign Exchange

Foreign exchange, or Forex, is the conversion of one countrys currency into that of another. The
value of any particular currency is determined by market forces based on trade, investment, tourism, and
geo-political risk Foreign exchange is handled globally between banks and all transactions fall under the
auspice of the Bank of International Settlements.

Factors affecting Demand and Supply ofExchange rate

 Imports and Exports a rise in import will increase the supply of ones currency consequence, is
depreciation of the currency. Vice versa for exports. Money supply of the currency decrease in money
supply of the currency will reduce its supply in the market and shift the supply curve to left giving a rise
to the price of the currency Increase in foreign cash inflow an increase in foreign inflow of cash will
increase the demand for the currency appreciating the price.

The foreign exchange market

The foreign exchange market involves firms, households, and investors who demand and supply
currencies coming together through their banks and the key foreign exchange dealers. Figure 1 (a) offers
an example for the exchange rate between the U.S. dollar and the Mexican peso. The vertical axis shows
the exchange rate for U.S. dollars, which in this case is measured in pesos. The horizontal axis shows the
quantity of U.S. dollars being traded in the foreign exchange market each day. The demand curve (D) for
U.S. dollars intersects with the supply curve (S) of U.S. dollars at the equilibrium point (E), which is an
exchange rate of 10 pesos per dollar and a total volume of $8.5 billion.