Introduction to Finance

• Financial Management
Financial managers use currency exchange 
markets to hedge against currency exchange risk associated with pos-
sible changes in the exchange rates between currencies. Financial 
managers may hedge in the forward markets or seek the aid of banks 
to sell unneeded currencies or to purchase currencies needed to con-
duct business operations. Financial managers also rely on banks and 
other fi nancial institutions to aid them in their international transac-
tions, both as importers and as exporters.
Summary
LO 6.1 
The international monetary system evolved from a gold 
standard system to today’s system of fl exible exchange rates.
LO 6.2 
The developments toward European economic unifi cation 
began through the creation of the European Union (EU) which con-
sisted of 28 member countries at the end of 2015. However, the 
future economic and fi nancial viability of the EU will be tested by 
the United Kingdom’s decision in June, 2016 to withdraw from the 
EU. Nineteen of the EU countries, known as eurozone members, have 
adopted the euro as their common currency and the European Central 
Bank as their central monetary policy-making authority.
LO 6.3 
Currency exchange markets are electronic markets where 
banks and institutional traders buy and sell currencies on behalf 
of businesses and others, and for their own accounts. A currency 
exchange rate indicates the value of one currency relative to another 
currency. 
LO 6.4 
Currency exchange rates are determined by supply and 
demand relationships, relative infl ation rates, relative interest rates, 
and political and economic risks. 
LO 6.5 
Firms that engage in international business activities, such as 
selling goods and services in foreign countries or purchasing goods 
and services from providers in foreign countries, are concerned with 
currency exchange rate risk, which is the risk of fl uctuating currency 
exchange rates over time. Changes in relative exchange rates can alter 
the costs of exporting relative to those of importing goods and ser-
vices, and can aff ect the profi tability of international business trans-
actions that have settlement dates in the future. Businesses have the 
opportunity of “hedging” against negative movements in relative 
exchange rates by entering into forward exchange rate contracts.
LO 6.6 
Firms engaged in international business activities often have 
limited knowledge of the credit worthiness of their foreign counter-