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MGT520 - International Business - Lecture Handout 41

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Learning objectives:

  1. Describe how demand and supply determine the price of foreign exchange.
  2. Discuss the role of international banks in the foreign-exchange market.
  3. Assess the different ways that firms can use the spot and forward markets to settle international transactions.
  4. Summarize the role of arbitrage in the foreign-exchange market.
  5. Discuss the important aspects of the international capital market.


  1. Foreign exchange is a commodity that consists of currencies issued by countries other than one’s own. The exchange rate is the price of one currency in terms of another, at the equilibrium price of the foreign currency.
  2. A direct quote is the price of the foreign currency in terms of the home currency, while an indirect quote is the price of the home currency in terms of the foreign currency


  1. Traditionally, different countries have different currencies (although the appearance of the EU and the euro have dramatically decreased the number of international currencies that most people will use). If you have examples of different currencies, these can be shown or passed around. Students are particularly intrigued by the pictures of foreign rulers on foreign currency, many of whom they have never heard of.

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MGT520 - International Business - Lecture Handout 30

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The World Trade Organization:

The World Trade Organization (WTO) was founded in 1995, and is comprised of 146 member countries and 30 observer countries. The WTO has three primary goals: to promote trade flows by encouraging nations to adopt non-discriminatory and predictable trade policies, to reduce remaining trade barriers through multilateral negotiations, and to establish impartial procedures for resolving trade disputes among members.

Problem Sectors:

One challenge facing the WTO is dealing with sectors of the economy such as agriculture and textiles that most nations protect. Groups including the Cairns Group (a group of major agricultural exporters) have pressured the WTO to ensure that the Uruguay Round policies dealing with agricultural trade are implemented according to schedule. Similarly, developing countries are monitoring the dismantling of the Multifibre Agreement (MFA), which created a complex array of quotas and tariffs on trade in textiles and apparel.

Read more: MGT520 - International Business - Lecture Handout 30