Forum-NexusWelcome to Switzerland!!

Brian David ButlerProfessor of international finance and global entrepreneurship with Forum-Nexus Study Abroad. Guest lecturer with the IQS Business School of the Ramon Llull University in Barcelona, and the Catholic University of Milan. Previously, Brian taught finance, economics and global trade courses at Thunderbird’s Global MBA program in Miami, and worked as a research analyst with the Columbia Business School in New York City. Brian currently lives in Recife, Brazil where he is teaching classes on “Global Entrepreneurship” at the university FBV.

A global citizen, Brian was born in Canada, raised in Switzerland (where he attended international British school), educated through university in the U.S., started his career with a Japanese company, moved to New York to work as an analyst, married a Brazilian, and has traveled extensively in Latin America, Asia, Europe and North America.

briandbutler@gmail.com

LinkedIn/briandbutler

Skype: briandbutler

Find my slides:

www.slideshare.net/briandbutler

Expectations:

▫Attend classes – exams will be from lectures, from assigned readings and from guest lecturers/ professional visits

▫Turn in assignments before class ▫Be prepared for class discussions – lots of small

group assignments during class▫Contribute to group assignment (team grading /

peer review)▫No sleeping, no laptops, no phones (sorry) ▫If your tired… standup, go get a drink, come back

Required books

•Required Textbook▫'An Introduction to Global Financial

Markets', by Stephen Valdez, Palgrave Macmillan, 5th Edition, 2006

▫'Fixing Global Finance', by Martin Wolf Yale University Press, updated 2010

Assigned Readings

•Martin Wolf book

▫Final chapter (ch 8) “From Imbalances to the Subprime Financial Crisis”

▫Recommended: First four Chapters

• Finance book

▫Chapter 10 – foreign

exchange ▫ Chapter 11 - European

Economic and Monetary Union▫ Switzerland – p 288▫ Euro – p 289, p304

• Optional additional reading▫ Chapter 2 – banking

background p30-38▫ Chapter 6 – the money and

bond markets▫ Chapter 12 – traded options▫ Chapter 13 - Futures

review

•Discussion

Discuss Switzerland/ Euro / crisis…

•Articles? Observations? Discuss….

•Note: observations should come from reading (wall street journal, etc)… any other sources?

•CURRENCIES

•If the US/EUR exchange rate was $1.2/euro and became $1.4/euro

•Questions: ▫did it become cheaper or more

expensive for US companies to import Spanish wine?

▫Did it become cheaper or more expensive for US consumers to travel to Europe?

Question

Question: over the past year, has it become “more expensive” or “cheaper” to travel to Europe?

Approx $1.2 / euro

Approx $1.45 / euro

How about for British? Has it become more or less expensive to travel to the Eurozone?

1 pound buys 1.1 euros

1 pound buys 1.5 euros

Also more expensive (be careful of inverted graph!!)

1 pound buys 1.1 euros

1 pound buys 1.5 euros

Question…. So, are British EXPORTS more, or less competitive?(since the crisis began)

1 euro buys 0.70 pounds

1 euro buys 0.90 pounds

Eurozone consumers can BUY more British goods for less euros:

1 euro buys 0.70 pounds

1 euro buys 0.90 pounds

Question. Has Britain benefited from having a FLOATING CURRENCY during the crisis?

(not being in the Euro-zone)?

Yes!

How does this compare with Spain, Greece?

Should Spain / Greece drop out of the Euro (to regain competitiveness)?

(think about this as you answer your team projects)

How about Switzerland?

Question: What are the major exports/ industries?

http://www.nationsonline.org/oneworld/switzerland.htm

Q. What do you notice that is unique about Switzerland?

http://www.nationsonline.org/oneworld/switzerland.htm

notes

•Ties to Germany = important

•Currency appreciation HURTS Swiss industry

•Why? Explain…

Challenges for Switzerland•Currency Appreciation:

“the Swiss franc will tend to

appreciate during periods of

global financial volatility”EIU, special report on Switzerland, May 2011

http://finance.yahoo.com/q/bc?t=5y&s=EURCHF%3DX&l=on&z=l&q=l&c=eurusd%3Dx

Swiss franc appreciates during crisis

Question: does Switzerland get more expensive? Or less?

Challenges for Switzerland

•Currency appreciation:•“investors’ fears over the stability of the euro will periodically lead them to seek a safe haven in the Swiss franc”

EIU, special report on Switzerland, May 2011

•Which is more important to the Swiss

•The SFR/ USD exchange rate?

•Or, the SFR/ EUR exchange rate?

•Why?

Challenges for Switzerland

EIU, special report on Switzerland, May 2011

•During the crisis, whose exports have become more competitive…. Switzerland’s or Germanys?

currency

EIU, special report on Switzerland, May 2011

Euro = stronger vs. US dollar

http://finance.yahoo.com/q/bc?t=5y&s=EURCHF%3DX&l=on&z=l&q=l&c=eurusd%3Dx

Euro = weaker vs. Swiss Franc

currency

•So, would Switzerland benefit from being inside the Euro zone? How?

EIU, special report on Switzerland, May 2011

How does this compare with Spain, Greece?

Should Spain / Greece drop out of the Euro (to regain competitiveness)?

(think about this as you answer your team projects)

•CURRENCY MARKETS

5 year

Crisis Oct 2008 US

Dec ‘09 – May ‘10Greece crisis builds

Concerns about USD debt

Rush to “safety” of US Treasuries

Question: can you predict the future exchange rate?

How currency markets set:

•Many markets ….banks set the market for FX trading•There is no such thing as “THE” exchange rate.•There are many•Arbitrage is the mechanism that equalizes exchange rates across markets….•Its how FX rates are set

Structure of the U.S. Foreign Exchange Market

StockbrokersStockbrokers

CLIENT with $US whowants to buy euros

CLIENT with $US whowants to buy euros

Local Bank

Local Bank

StockbrokersStockbrokers

C M E(I M M) P S X

C M E(I M M) P S X

Foreign Exchange Brokers

Foreign Exchange Brokers

CLIENT with euros whowants to buy $US

CLIENT with euros whowants to buy $US

Local Bank

Local Bank

NEW YORKINTERBANK

MARKET

CHIPS

Adapted from St. Louis Fed Review (March 1984) p. 9, by Robert Grosse

1. US Exporters US Importers Paying in £ 2. British Direct Investors US Direct Investors in the UK3. US Foreign Investors

Remitting Profits British Foreign Investors in the US Remitting Their Profits

4. British Portfolio Investors US Portfolio Investors in the UK5. Bear Speculators Bull Speculators6. Arbitrageurs7. Government “interveners”

The Foreign Exchange Marketfor £ In New York

Suppliers of Pounds Demanders for Pounds

P

$/£

XR

0poundsQeq

Q

S£

D£

99

175

242

231

238

664

1359

118

102

79

125

199

461

753

88

67

71

101

254

94

139

351

637

9060

66

74

120

167

49

55

115

147

504

79

82

136

105

244

465

161

87

76

291

55

184

111

0

56

Germany

Hong Kong

Switzerland

Singapore

Japan

US

UK

Apr-89

Apr-92

Apr-95

Apr-98

Apr-01

Apr-04

Apr-07

Source: BIS

The World’s Money FlowsDaily Currency Market Turnover ($billion) Net of Local Double-Counting; No Adjustment for Cross-Border Double-Counting

Huge!

•(in 2008) •London = 1.3 trillion dollars traded per

day. US = 600 billion traded per day….more than entire circulation of the USA

•Banks trading deposits with each other = only important driver of “the” FX market.

Forex Market Characteristics

• The forex market is mostly decentralized, and 63% of value is transacted by market makers (big commercial banks).

• Only about 5% of the volume is for bank customers for international trade transactions.

• For short-time horizons (one week or less) 90% of traders use chartist methods for forecasting. Some use other methods (esp. leading indicators) as well.

• For long horizons of one year or more, 33% of traders use only fundamentals and 85% view fundamentals as more important than charts.

New problem…break in to teams of 2

Hedging problem

•Imagine you are a Swiss producer of machine parts. You found a customer in Europe willing to pay (upon delivery) …1 million Euros for a truck of parts, to be delivered in 6 months. Imagine your estimated profit margin is just 5%. In 20 words or less, describe your currency risk (what are you afraid might happen?).

Hedging problem

•Fear = Euro depreciate, SFR appreciate

•Assume SFR appreciates by 10%, what just happed to your profits?

•Is it realistic to assume the SFR might appreciate by 10% or more in just 6 months?

Yes!

•Currencies CAN and DO move quickly…

5 year

Crisis Oct 2008 US

Dec ‘09 – May ‘10Greece crisis builds

Concerns about USD debt

Rush to “safety” of US Treasuries

Question: can you predict the future exchange rate?

Hedging problem

•Fear = Euro depreciate, SFR appreciate

•Question: what could you do to eliminate your currency risk?

Hedging problem

•Negotiate sale in YOUR currency… in SFR… so customer must pay SFR… but is risk really gone? Where did it go?

•What else?

Hedging problem

•Question: would you really use a deposit hedge? (does it make business sense?)

•What OTHER options?

Hedging problem

•Forward contract to buy which currency (to sell which currency)?

Hedging problem

•Forward – how? Bank? Exchange? Explain…

Hedging problem

•Futures – how? Bank? Exchange? Explain…

•(which currency to buy/ sell forward?)