Finance in LA

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Finance in LA
Mafalda by Quino
Today, I went shopping with my Mom. My God, it
was as if her poor purse had colitis!
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(No Transcript)
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Important definitions

• Inflation
• Inflation is the pervasive and sustained rise in
  the aggregate level of prices measured by an
  index of the cost of various goods and services.
• Exchange rate
• In relation to foreign exchange of money, the
  price of a country's currency expressed in terms
  of one unit of another country's currency.

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Definitions (cont)

• Interest rate
• Charge for the use of money, usually figured as a
  percentage of the principal and computed annually.

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Inflation

• Types
• Demand-pull
• Cost-push
• Consumer expectations
• Impact on companies
• Illusory profits and decapitalization
• Rising financial costs
• Liquidity complications

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How to manage inflation

• Forecast inflation rates and government actions
• Replacements
• Preserve real margins
• Shorten credit and stretch payables

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Exchange rate

• Why do we need to exchange currencies?
• Import, export, investment, loans and credits
• Countries trade currencies like products.
• Exchange rate is the price, based on supply and
  demand, of a currency in terms of other one.
• 10 pesos per dollar or .01 dollars per peso.
• Currencies might be strong or weak.
• Strong stable, large demand
• Weak Unstable, decreasing value, larger offer

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Conclusion of over and undervaluation of
currencies
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Exchange rate

• Types of exchange rates
• Fixed
• Free fluctuation
• Managed fixed (Bands)
• Convertibility
• Escape valve Black market

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Exchange rate (cont.)

• Reasons to restrict currency exchanges
• Maintain reserves
• Import goods
• Pay debts
• Restrict outflow of capital
• Mechanisms to restrict exchange
• Import licensing
• Multiple exchange rates
• Control of quantities of exchange.

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Foreign exchange black market

• It is unavoidable in LA
• Range

Large Institutional Cambista
Street vendors
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Black markets (Brazil 1990)
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Coping with foreign exchange exposure

• Predicting exchange rates
• Trade balance
• Debt servicing
• Capital flight
• Reserve changes
• Alternate invoicing
• Purchase or receiving payment for the good in its
  own reference currency.
• Hedging
• Futures

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Scarcity of capital

• In the 1994-1995 crisis the whole Mexican stock
  market had a smaller capital value than
  Microsoft's.
• Venture capital is limited in LA.
• Financial institutions are weak compared to other
  countries.
• The main problem is to get capital at a
  reasonable interest rate.
• This is a problem for every member of the economy.

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Dealing with scarcity

• Use labor-intensive manufacturing
• Retain earnings for long term projects
• Capital can be raised locally
• Take advantage of negative interest rates
• Special lines of credit from governmental
  organizations
• International organizations
• Use of financial instruments

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Grades
Range 104-56 Mean 86 Median 88 Mode 88