Incoterms 2010 and International Business - 101
International Business: Environments and Operations, 15e (Daniels et al.)
CHAPTER EIGHT: GLOBAL FOREIGN-EXCHANGE MARKETS
CHAPTER EIGHT: GLOBAL FOREIGN-EXCHANGE MARKETS
OPENING CASE: Going Down to the Wire in the Money-Transfer Market
This case describes Western Union’s international money transfer services and the increasing competition the company is facing from banks. Western Union has been particularly successful in attracting business from Mexican emigrants in the United States who send part of their paycheck home to support their families. Western Union charges relatively high fees and uses its own exchange rates that are usually significantly lower than the market rate. Banks have been introducing their own money transfer services, many with lower fees and better exchange rates than Western Union. Due to many Mexicans’ distrust of banks, however, Western Union continues to enjoy large profit margins and a large market share in the money transfer business.
Questions
- The United Arab Emirates, of which Dubai is a member, is one of the Gulf Cooperation Council members. How does it compare with other GCC countries in terms of total population and non-immigrant population as a percentage of total population? How important do you think migration and therefore capital remittances are for each of the countries in the GCC?
While 30 percent of the Saudi Arabian population is expatriate, in Bahrain it is 26 percent. Expatriates account for 80 percent of the population in the United Arab Emirates, while they constitute 27 percent in Qatar, 63 percent in Kuwait, and 62 percent in Oman. The large-scale recruitment of an expatriate work force is justified by the need for executing huge development projects in the fast-growing GCC countries. Another factor was the willingness of expatriate workers to undertake hazardous jobs with lower wages that Gulf citizens refuse to do. (LO: 2, Learning Outcome: To identify the major characteristics of the foreign-exchange market and how governments control the flow of currencies across national borders, AACSB: Dynamics of the Global Economy)
- Should the U.S. government regulate the exchange rate that financial institutions charge Mexican migrant workers for sending money back to Mexico? Why or why not?
Many people use the word “remittance” when they refer to sending money from the United States to other countries. Federal law defines “remittance transfers” to include most electronic money transfers from consumers in the United States through “remittance transfer providers” to recipients abroad, including friends, family members, or businesses. Remittance transfers are commonly known as “international wires,” “international money transfers,” or “remittances.”
Certain federal protections apply if you send money abroad. Under federal law, many money transmitters, banks, and credit unions and possibly other types of financial services companies qualify as “remittance transfer providers.” They must generally provide consumers certain information before they make remittance transfers. This includes information about:
- The exchange rate
- Fees and taxes they collect from you
- Fees charged by the company’s agents abroad and certain other institutions involved in the transfer process
- The amount of money expected to be delivered, not including foreign taxes or certain fees charged to the recipient
- If appropriate, a statement that additional foreign taxes and fees may be deducted from the remittance transfer
You also must receive information about when the money will be available, instructions on your right to cancel transfers, what to do in case of an error, and how to submit a complaint.
Regarding the right to cancel: After paying, you will typically have 30 minutes (and sometimes more) to cancel the transaction at no charge, unless the transfer has already been picked up or deposited into the recipient’s account.
With these current regulations in place, an argument could be made that no additional regulations be required. (LO: 2, Learning Outcome: To identify the major characteristics of the foreign-exchange market and how governments control the flow of currencies across national borders, AACSB: Dynamics of the Global Economy)
Teaching Tips: Carefully review the PowerPoint slides for Chapter Eight and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, also review the figures, tables, and maps in the text. Students can check currency prices by visiting the Web site http://finance.yahoo.com.
CLOSING CASE: Do Yuan to Buy Some Renminbi?
The yuan is the official currency of China. It has been historically fixed and controlled by the Chinese government, but that may be changing. As China becomes a greater global exporter and economic powerhouse, critics are claiming that the currency is being undervalued and manipulated in an attempt to protect domestic markets. There are additional levels of complexity impacting China as the nation must deal not only with economic competition, but also internal political and social pressures. As China continues to loosen capital controls, there is great fear that the government may lose control of inflation and interest rates, thereby causing a great deal of labor and social unrest, while negatively impacting China’s competitive advantages. There are currently platforms in place to increase the circulation of the yuan, but those platforms are currently limited and severely restricted.
Questions
8-3 Why is it important for the yuan to become a major world currency?
China is now a leader in international world trade, a major exporter, and currently holds the largest foreign exchange reserve in the world. The nation has one of the highest GDPs in the world, and is increasing its economic power. The sheer size, volume, and magnitude of China’s economic activity may also be arguments for the yuan to become a major world currency. (LO: 1, Learning Outcome: To learn the fundamentals of foreign exchange, AASCB: Analytical Skills)
8-4 What needs to take place for the yuan to be listed right along with the U.S. dollar and the euro as global currencies?
The Chinese government will need to further loosen controls and restrictions to promote the free trade and exchange of the currency in international markets. There will also be a need for further development of trading platforms and banking initiatives to promote the circulation and exchange of the currency. (LO: 2, Learning Outcome: To identify the major characteristics of the foreign-exchange market and how governments control the flow of currencies across national borders, AACSB: Dynamics of the Global Economy)
8-5 Why is the Chinese government so hesitant to open up the yuan to market forces to determine its value inside and outside of China?
The major concerns of the Chinese government revolve around the impact of market forces upon inflation and interest rates within the country. Consequences of inflation and higher interest rates may create labor and social unrest, as well as political complications and a loss of economic competitiveness. (LO: 2, Learning Outcome: To identify the major characteristics of the foreign-exchange market and how governments control the flow of currencies across national borders, AACSB: Dynamics of the Global Economy)
8-6 What roles do foreign banks like HSBC and electronic platforms like Thomson Reuters and ICAP play in helping the yuan move closer to becoming a global currency?
These entities have the ability to create platforms and markets to stimulate and expedite currency trading. Consequently, these entities can increase the circulation of the yuan. Further, these actors will be instrumental in allowing the yuan to be exchanged in a floating exchange system against the world’s other leading currencies. (LO: 4, Learning Outcome: To examine the different institutions that deal in foreign exchange, AACSB: Analytical Skills)
8-7 By the end of 2013, the Bank for International Settlements will have issued its next triennial survey on foreign exchange. Look up the report on the bis.org Web site. What are the major differences in that survey from what is reported in the 2010 survey in the chapter?
Trading in foreign-exchange markets averaged $5.3 trillion per day in April 2013. This is up from $4.0 trillion in April 2010 and $3.3 trillion in April 2007. (LO: 3, Learning Outcome: To describe how the foreign-exchange market works, AACSB: Reflective Thinking)
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