Introduction to Finance

DISCUSSION QUESTION 2
Do you expect the U.S. dollar will appreciate or depreciate against the euro during the 
next year? Why?
LEARNING ACTIVITY
Go to the CNNMoney website, http://money.cnn.com. Access “markets,” and then “cur-
rencies” and fi nd current currency exchange rates for the European euro relative to the 
United Kingdom (British) pound, and the Japanese yen. Find both direct and indirect 
currency exchange quotations.
political risk 
risk associated 
with the possibility that a national 
government might confi scate 
or expropriate assets held by 
foreigners
economic risk 
risk associated with 
possible slow or negative economic 
growth, as well as variability in 
economic growth
arbitrage 
simultaneous, or 
nearly simultaneous, purchasing 
of commodities, securities, or 
currencies in one market and selling 
them in another where the price is 
higher

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C H A PT E R 6 International Finance and Trade
6.5
Conducting Business Internationally
A 
multinational corporation
is a fi rm that engages in international business activities, such 
as selling goods and services in foreign countries or purchasing goods and services from 
providers in foreign countries. U.S. fi rms conducting business internationally are concerned 
about the value of the U.S. dollar relative to the values of other currencies. A higher U.S. dollar 
relative to, say, the euro makes U.S. products and services more costly than their eurozone 
competitors in eurozone member countries. Thus, a higher U.S. dollar is likely to result in 
lower export levels and higher import levels. 
Firms that have foreign sales must be concerned with the stability of the governments and 
changing values of currency in the countries in which they do business. They must also pay 
attention to commodity price changes and other uncertainties related to monetary systems. 
Multinational corporations may also be faced with ethical situations that must be addressed. 
While our focus here is on business corporations, individuals and institutional investors 
engaged in international business activities also face many of the same trade and currency-
related issues.
Exchange Rate Developments for the U.S. Dollar
The dollar continues to be an important currency for international commercial and fi nancial 
transactions. Because of this, both the United States and the rest of the world benefi t from a 
strong and stable U.S. dollar. Its strength and stability depend directly on the ability of the 
United States to pursue noninfl ationary economic policies. In the late 1960s and the 1970s, 
the United States failed to meet this objective. Continuing high infl ation led to a dollar crisis 
in 1978, which threatened the stability of international fi nancial markets.
Figure 6.2
shows the strength of the U.S. dollar relative to an index of major currencies 
(Australia, Canada, European eurozone countries, Japan, Sweden, Switzerland, and the United 
Kingdom) for the 1984 through 2015 period. As infl ation was brought under control in the 
early 1980s and economic growth accelerated after the 1981–1982 recession, the dollar rose 
against other major currencies until it reached record highs in 1985. As discussed, relatively 
higher economic growth and relatively lower infl ation rates lead to a relatively stronger currency.