MENOPAUSIA Introducción

Bretton Woods Agreement crawling-peg system currency futures contracts currency-basket peg derived demand dollarization exchange rate exchange-rate system floating-rate system foreign exchange market

forward exchange contract forward transaction hedging

International Monetary Fund (IMF) pegged exchange rate

Purchasing Power Parity (PPP) real interest rate

spot transaction

the bid and the ask spread transaction exposure translation exposure Plants respond Plants are indicators ofchanging Human and natural processes Plant response

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T H E D O L L A R I Z AT I O N O F S A N

M I G U E L

With its economy shrinking and inflation being the highest in the western hemisphere, the president of San Miguel has decided that his country should abandon its own currency in favor of the US dollar.The president of this small, South American country reasons that the dollar will bring economic, and perhaps political, stability to San Miguel. He feels that having the American dollar as its official currency will restore investor confidence in San Miguel’s economy and force fiscal and monetary responsibility on the part of the government.

Last year, the economy of San Miguel contracted 7 percent and inflation is currently running at over 60 percent.The San Miguel peso has lost 20 percent of its value in the past six months and foreign reserves are rapidly being depleted. It is hoped that by adopting the dollar as the official currency of the country, inflation will be eliminated, foreign investment will increase in the country, and economic growth will occur.

The president is using the example of Argentina as his model; however, he plans to go further than this neighbor did: Argentina now pegs its currency to the dollar on a one-for-one basis.The president’s plan calls for San Miguel to slowly replace all its pesos with American dollars and only use its own currency for small transactions.All San Miguel pesos would be exchanged for dollars at a set exchange rate and all financial statements would be issued in dollars. No new national currency would be created.

The idea has the support of the business community and the International Monetary Fund (IMF); however, there is opposition from indigenous groups and others who worry that the plan would have an adverse effect on the poor. Others worry that such a plan would also remove some national sovereignty and put the United States in charge of monetary policy in San Miguel.At present both sides are strengthening their positions.The president and the business community are pushing for a rapid conversion and the opposition is planning demonstrations against the plan.There has been a call for work stoppages and mass protests on the part of the opponents.The president dismisses the concerns of the opposition as foolish and points to Panama, which uses the US dollar as its currency. He states that Panama is a completely independent country with economic stability and that Panama is poised for strong economic development. San Miguel should learn from the Panamanian experience, states the president.

. . .

CASE 5

CASE DISCUSSION POINTS

1. How would replacing the peso with the dollar affect monetary policy in San

Miguel?

2. What are the advantages and disadvantages of a country adopting the US

dollar as its currency?

3. Other than replacing its currency, what else could be done to help solve San

Miguel’s economic problems?

4. What would you recommend?

Note: This is intended to be a fictional case; however, it is based on an actual recent situation.

Case prepared by Charles A. Rarick CASE 5

After reading this chapter you should be able to:

• Understand the nature of capital markets.

• Know the terminology and basic structure of a bond issue.

• Understand stocks and stock markets from a domestic and international perspective. • Know the basics of how banks make money and the effects of regulations.

• Be familiar with the motivations to seek capital outside of one’s home country. • Understand the implications of regulations for the choice of country of stock market

listings.

The Preview IB Strategic Insight shows you how companies such as Baidu and Hurray! can get money needed for expansion and growth outside of their own country. It shows one of many options companies use to get needed funds. In this chapter, you will find some basic background on the array of sources that all companies use to get needed funds. However, more importantly, you will learn how these sources of funds are becoming more globalized.

Hurray! is a Chinese wireless-services provider and a leader in China for wireless music distribution and other wireless value-added services including artist development and music production. To expand its wireless music-related businesses, Hurray! needed additional cash. Rather than taking on debt from loans from banks, Hurray!’s management decided to raise $70.5 million by sell- ing Hurray! stocks in the US. According to Steven L. Toronto, a managing partner of the Beijing office of Morrison & Foerster, a San Francisco law firm that advised Hurray! on how to enter the US equity (stock) markets, Hurray! chose to sell its stocks on NASDAQ (National Association of Securities Dealers Automated Quotation system) rather than on the older New York Stock Exchange. The rationale was that NASDAQ has a global reputation for listing technology and less established companies.

The biggest Chinese company on NASDAQ is Baidu.com Inc. Baidu is a Beijing company that sold its first stocks to the public on NASDAQ in 2005. Baidu is the Chinese Google and the leading Chinese-language Internet search engine. Its first public offering of 4,040,402 American depositary shares, or ADSs (the mechanism used to sell shares of foreign companies in US stock exchanges), sold for US$ 27 per ADS on the NASDAQ under the symbol “BIDU.” Later the price rose to over $150. According to the Baidu website,

the name “Baidu” was inspired by a poem written more than 800 years ago during the Song Dynasty. The poem compares the search for a retreating beauty amid chaotic glamour

with the search for one’s dream while con- fronted by life’s many obstacles. [A verse in the poem states] “hundreds and thousands of times, for her I searched in chaos, suddenly, I turned by chance, to where the lights were waning, and there she stood.” Baidu, whose literal meaning is hundreds of times, repre- sents persistent search for the ideal.

Recently, HP has started preloading the Baidu search engine on its PCs. One of Baidu’s innov- ations is the “pin-yin” search, which allows users to type in Chinese keywords using English letters. Other Chinese companies recently seeking capital in the NASDAQ market include online games company Shanda Networking Development Co., whose initial public offering raised $152 million, and 51job Inc., a recruitment website com- pany, which raised $73.5 million largely because US investors see a huge demand for job-search services in China with its rapidly growing labor market. Over 300 Chinese companies are now listed on stock markets outside the mainland, although some Chinese academics think that this allows foreign investors to reap the benefits of the growth of Chinese companies.

Sources: Adapted from BusinessWeek Online, 2004, “New rules for China’s IPO game,” www.businessweek. com, August 8; www.hurray.com.cn/english/home.htm; http://ir.baidu.com; People’s Daily Online, 2006, “Overseas listings of big companies causes controversy,” March 14; Joseph Weber and Brian Bremner, 2005, “A Chinese banquet for NASDAQ,” BusinessWeek Online, www.businessweek.com, September 12.