Arizona State University. MKT 397 Study Guide for Exam 3. Latest 2020/21.Financial Environment Analysis (Week 6)
Blackboard lectures
Financial
... [Show More] Environment Analysis I
1. Country/Firm-specific examples of how various aspects of the financial environment affect
business strategies
a. “For example, we really created a good business in Zimbabwe during the 1990’s. But by
the early 2000’s the government was too unstable, the currency had devalued, and we
couldn’t plan or get resources. So, we walked away from the market. We also pulled out
of some cities in Russia after the ruble devalued in the 1990’s.”
b. U.S. retailers Target-ing avid Canadian shoppers
2. Various types of exposures that firms have to exchange rate fluctuations
a. Car importer expects a batch of cars to arrive from the U.K. in three months. Payment
must be made to the U.K. company in pound sterling when the cars arrive.
b. Exchange rate fluctuations have the potential to turn the importer’s expected profits from
the sales of the cars to losses.
c. For accounting purposes, an Multi-national may need to express its financial statements
in a single currency.
3. Key drivers of changes in the financial environment
a. Determined by: changes in the “real” economy, a country’s monetary policy, and
monetary policies of other countries.
4. Role of central banks in the economy
a. Monetary policy:
i. Formulated and implemented by a central bank. (ours is the Federal Reserve
Board)
ii. Through the banking system
When the U.S. dollar strengthens against other currencies, the foreign sales of U.S. exporting firms is
usually adversely affected. This is an example of operating exposure.
Financial Environment Analysis II
1. How do fractional reserve banking systems work?
a. Assume that there is one bank in the entire economy. Then assume that all transactions
are done through the banking system (consisting of a single bank, no cash transactions)
b. Total amount of currency= 100 U.S.$ (all with one person A)
c. A deposits all the cash in a bank
i. Bank’s assets: 100 $ cash
ii. Bank’s liabilities: Owes a 100$
2. What might happen if participants in the banking system were free to pursue their goals?
a. B comes to the bank to borrow money; bank loans B 100$, which B deposits in his own
account
i. Bank’s assets: $100 cash; B owes bank 100$ (loan)
ii. Bank’s liabilities: Owes a $100 (A ‘s account deposit); Owes B $100 (B’s account
deposit)
iii. “Money supply” in the system is now $200.
iv. As the bank continues making further loans, the money supply keeps increasing.
b. Money supply: defined to be a group of safe assets that households and businesses can
use to make payments or to hold as short-term investments. [Show Less]