Molson Coors earns revenue and incurs costs in several currencies, including the US dollar, Canadian dollar, and British pound. This exposes the company to fluctuations in exchange rates between currencies. Most modern currencies operate under a managed floating exchange rate system, where rates are set by supply and demand with occasional government intervention. Some developing countries attempt to peg their currencies to a major currency like the US dollar.

2. Molson Coors Deals with Fluctuating Exchange Rates Learning Objectives The “exchange rate exposure” results from Molson Coors earning revenue and incurring costs in several currencies, particularly the U.S. dollar, the Canadian dollar, and the British pound. APPENDIX Explain the gold standard and the Bretton Woods system . Discuss the growth of international capital markets . 18.3 Discuss the three key features of the current exchange rate system . 18.2 Understand how different exchange rate systems operate. 18.1

3. Exchange Rate Systems Floating currency The outcome of a country allowing its currency’s exchange rate to be determined by demand and supply. Exchange rate system An agreement among countries on how exchange rates should be determined. Learning Objective 18.1

4. Exchange Rate Systems Managed float exchange rate system The current exchange rate system, under which the value of most currencies is determined by demand and supply, with occasional government intervention. Fixed exchange rate system A system under which countries agree to keep the exchange rates among their currencies fixed. Learning Objective 18.1 Don’t Let This Happen to YOU! Remember That Modern Currencies Are Fiat Money

5. The Current Exchange Rate System 1 The United States allows the dollar to float against other major currencies. 2 Most countries in Western Europe have adopted a single currency, the euro . Euro The common currency of many European countries. 3 Some developing countries have attempted to keep their currencies’ exchange rates fixed against the dollar or another major currency. Learning Objective 18.2 The current exchange rate system has three important aspects:

6. The Current Exchange Rate System Learning Objective 18.2 The Floating Dollar FIGURE 18-1 U.S. Dollar–Canadian Dollar and U.S. Dollar–Yen Exchange Rates, 1973–2006

7. The Toronto Blue Jays Gain from the Rising Value of the Canadian Dollar Learning Objective 18.2 The Toronto Blue Jays have benefited from the rising value of the Canadian dollar. Making the Connection

8. The Current Exchange Rate System Learning Objective 18.2 The Theory of Purchasing Power Parity What Determines Exchange Rates in the Long Run? Purchasing power parity The theory that in the long run, exchange rates move to equalize the purchasing powers of different currencies.

9. The Current Exchange Rate System Learning Objective 18.2 The Theory of Purchasing Power Parity What Determines Exchange Rates in the Long Run? Three real-world complications keep purchasing power parity from being a complete explanation of exchange rates, even in the long run: • Not all products can be traded internationally. • Products and consumer preferences are different across countries. • Countries impose barriers to trade.

10. The Current Exchange Rate System Learning Objective 18.2 The Theory of Purchasing Power Parity What Determines Exchange Rates in the Long Run? Tariff A tax imposed by a government on imports. Quota A government-imposed limit on the quantity of a good that can be imported.

11. The Big Mac Theory of Exchange Rates Learning Objective 18.2 Is the price of a Big Mac in Beijing the same as the price of a Big Mac in Chicago? Making the Connection

12. The Big Mac Theory of Exchange Rates Learning Objective 18.2 Making the Connection 7.77 yuan per dollar 3.42 yuan per dollar 11.0 yuan China 1.18 Canadian dollars per U.S. dollar 1.13 Canadian dollars per U.S. dollar 3.63 Canadian dollars Canada 9,100 rupiahs per dollar 4,398 rupiahs per dollar 15,900 rupiahs Indonesia 1.25 Swiss francs per dollar 1.96 Swiss francs per dollar 6.30 Swiss francs Switzerland 0.51 pound per dollar 0.62 pound per dollar 1.99 pounds Britain 121 yen per dollar 87 yen per dollar 280 yen Japan 3.11 pesos per dollar 2.56 pesos per dollar 8.25 pesos Argentina ACTUAL EXCHANGE RATE IMPLIED EXCHANGE RATE BIG MAC PRICE COUNTRY

13. Calculating Purchasing Power Parity Exchange Rates Using Big Macs Learning Objective 18.2A Solved Problem 18-2A 21.6 korunas per dollar 16.2 korunas per dollar 52.1 korunas Czech Republic 942 won per dollar 901 won per dollar 2,900 won South Korea 3.01 zlotys per dollar 2.14 zlotys per dollar 6.90 zlotys Poland 2.13 reals per dollar 1.99 reals per dollar 6.40 reals Brazil ACTUAL EXCHANGE RATE IMPLIED EXCHANGE RATE BIG MAC PRICE COUNTRY

14. The Current Exchange Rate System Learning Objective 18.2 The Four Determinants of Exchange Rates in the Long Run What Determines Exchange Rates in the Long Run? • Relative price levels. • Relative rates of productivity growth. • Preferences for domestic and foreign goods. • Tariffs and quotas. There are four main determinants of exchange rates in the long run:

15. The Current Exchange Rate System Learning Objective 18.2 The Euro FIGURE 18-2 Countries Adopting the Euro

16. Was the Euro Undervalued or Overvalued in 2007? Learning Objective 18.2 Determining whether a currency is undervalued or overvalued can be difficult. Making the Connection

17. The Current Exchange Rate System Learning Objective 18.2 Pegging against the Dollar A final key aspect of the current exchange rate system is that some developing countries have attempted to keep their exchange rates fixed against the dollar or another major currency. Pegging The decision by a country to keep the exchange rate fixed between its currency and another currency. The East Asian Exchange Rate Crisis of the Late 1990s

18. The Current Exchange Rate System Learning Objective 18.2 Pegging against the Dollar The East Asian Exchange Rate Crisis of the Late 1990s FIGURE 18-3 By 1997, the Thai Baht Was Overvalued against the Dollar

19. The Current Exchange Rate System Learning Objective 18.2 Pegging against the Dollar The East Asian Exchange Rate Crisis of the Late 1990s FIGURE 18-4 Destabilizing Speculation against the Thai Baht

20. The Current Exchange Rate System Learning Objective 18.2 Pegging against the Dollar The Decline in Pegging Following the disastrous events experienced by the East Asian countries, the number of countries with pegged exchange rates declined sharply. The Chinese Experience with Pegging In 1978, China began to move away from central planning and toward a market system.

21. Crisis and Recovery in South Korea Learning Objective 18.2 Making the Connection

22. Coping with Fluctuations in the Value of the U.S. Dollar Learning Objective 18.2 Solved Problem 18-2B

23. International Capital Markets Learning Objective 18.3 FIGURE 18-5 Growth of Foreign Portfolio Investment in the United States

24. International Capital Markets Learning Objective 18.3 FIGURE 18-6 The Distribution of Foreign Purchases of U.S. Stocks and Bonds by Country, 2006

25. An Inside LOOK Should the International Financial System Limit Currency Speculation? Can Asia Control the “Hot Money”? Foreign investors speculating in a currency create large fluctuations in the foreign exchange value of that currency.

26. Euro Exchange rate system Fixed exchange rate system Floating currency Managed float exchange rate system Pegging Purchasing power parity Quota Tariff K e y T e r m s

27. The Gold Standard and the Bretton Woods System Under the gold standard, the currency of a country consisted of gold coins and paper currency that could be redeemed in gold. The Gold Standard From a modern point of view, the greatest drawback to the gold standard was that the central bank lacked control of the money supply. The End of the Gold Standard Appendix

28. The Gold Standard and the Bretton Woods System Bretton Woods system An exchange rate system that lasted from 1944 to 1971, under which countries pledged to buy and sell their currencies at a fixed rate against the dollar. The Bretton Woods System International Monetary Fund (IMF) An international organization that provides foreign currency loans to central banks and oversees the operation of the international monetary system. Appendix

29. The Gold Standard and the Bretton Woods System The Bretton Woods System FIGURE 18A-1 A Fixed Exchange Rate above Equilibrium Results in a Surplus of Pounds Appendix

30. The Gold Standard and the Bretton Woods System The Bretton Woods System Devaluation A reduction in a fixed exchange rate. Revaluation An increase in a fixed exchange rate. Appendix

31. The Gold Standard and the Bretton Woods System The Collapse of the Bretton Woods System By the late 1960s, the Bretton Woods system faced two severe problems. The first was that after 1963, the total number of dollars held by foreign central banks was larger than the gold reserves of the United States. The second problem the Bretton Woods system faced was that some countries with undervalued currencies, particularly West Germany, were unwilling to revalue their currencies. Appendix

32. The Gold Standard and the Bretton Woods System The Collapse of the Bretton Woods System FIGURE 18A-2 West Germany’s Undervalued Exchange Rate Appendix

33. The Gold Standard and the Bretton Woods System The Collapse of the Bretton Woods System Capital controls Limits on the flow of foreign exchange and financial investment across countries. Appendix

34. The Gold Standard and the Bretton Woods System The Collapse of the Bretton Woods System FIGURE 18A-3 Destabilizing Speculation against the Deutsche Mark, 1971 Appendix