INTERNATIONAL FINANCIAL MANAGEMENT

Unit -I

Introduction

We are now living in a highly globalized and integrated world economy. American consumers,
for example, routinely purchase oil imported from Saudi Arabia and Nigeria, TV sets from
Korea, automobiles from Germany and Japan, garments from China, shoes from Indonesia,
handbags from Italy, and wine from France. Foreigners, in turn, purchase American-made
aircraft, software, movies, jeans, smart phones, and other products.

Continued liberalization of international trade is certain to further internationalize consumption

patterns around the world. Like consumption, production of goods and services has become
highly globalized. To a large extent, this has happened as a result of multinational corporations’
(MNCs) relentless efforts to source inputs and locate production anywhere in the world where
costs are lower and profits are higher. For example, personal computers sold in the world market
might have been assembled in Malaysia with Taiwanese-made monitors, Korean-made
keyboards, U.S.- made chips, and preinstalled software packages that were jointly developed by
U.S. and Indian engineers. It has often become difficult to clearly associate a product with a
single country of origin.

Three major dimensions set international finance apart from domestic finance. They are:

1. Foreign exchange and political risks.

2. Market imperfections.
3. Expanded opportunity set.

Since the beginning in the 1980, there has been an explosion in the international investment
through mutual funds, insurance products, bank derivatives, and other intermediaries by
individual firms and through direct investments by institutions. On the other side of the picture,
you must have realized that the capital raising is occurring at a rapid speed across the geological
boundaries at the international arena. In the given scenario, financial sector - especially the
international financial and banking institution, cannot be anything but go international. With the
India’s entry into the world trade organization since 1st January 1995 and consequent upon a
series of economic and banking reforms, initiated in India since 1991, barriers to international
flow of goods, services and investments have been removed. In effect, therefore, Indian economy
has been integrated with the global economy with highly interdependent components. Rapid
advancement in science and technology – especially supported by astronomical development and
growth in telecommunication and information technology, has provided a cutting- edge and
global leadership for India to participate in the international business. This, in turn, has
stimulated a phenomenal growth in India’s proactive participation in international exchange of
goods, services, technology and finance so as to knit national economies into a vast network of
global economic partners.

Financial deregulation, first in the United States, and then in Europe and in Asia, has prompted
increased integration of the world financial markets. As a result of this rapidly changing scene,
financial managers today must have a global perspective In this unit we try to help you to
develop and understanding of this complex, vast and opportunistic environment and explore how
a company or a dynamic business manager goes about making right decisions in an international
business environment with sharp focus an international financial management.

The field of international finance has witnessed explosive growth dynamic changes in recent
time. Several forces such as the following have stimulated this transformation process:

1. Change in international monetary system from a fairly predictable system of exchange

2. Emergence of new institutions and markets, involving a greater need for international
financial intermediation
3. A greater integration of the global financial system.

FOREIGN EXCHANGE

When trade takes place between the residents of two countries, the two countries being a
sovereign state have their own set of regulations and currency. Due to this problem arises in the
conduct of international trade and settlement of the transactions .While the exporter would like to
get the payment in the currency of his own country, the importer can pay only in the currency of
the importers country. This creates a need for the conversion of the currency of importer‘s into
that of the exporter‘s country. Foreign exchange is the mechanism by which the currency of one
country is gets converted into the currency of another country. The conversion is done by banks
who deal in foreign exchange.

Foreign Exchange Markets

The foreign exchange market is the market where one country’s currency is traded for others. It
is the largest financial market in the world.

Participants in Foreign Exchange Market

Participants in Foreign exchange market can be categorized into five major groups, viz.;
commercial banks, Foreign exchange brokers, Central bank, MNCs and Individuals and Small
businesses.

1. Commercial Banks:

The major participants in the foreign exchange market are the large Commercial banks who
provide the core of market. As many as 100 to 200 banks across the globe actively “make the
market” in the foreign exchange. These banks serve their retail clients, the bank customers, in
conducting foreign commerce or making international investment in financial assets that require
foreign exchange.

A bank that has committed itself to buy a certain particular currency is said to have long position
in that currency. A short-term position occurs when the bank is committed to selling amounts of
that currency exceeding its commitments to purchase it.

2. Foreign Exchange Brokers:

Foreign exchange brokers also operate in the international currency market. They act as agents
who facilitate trading between dealers. Unlike the banks, brokers serve merely as matchmakers
and do not put their own money at risk.

They actively and constantly monitor exchange rates offered by the major international banks
through computerized systems such as Reuters and are able to find quickly an opposite party for
a client without revealing the identity of either party until a transaction has been agreed upon.
This is why inter-bank traders use a broker primarily to disseminate as quickly as possible a
currency quote to many other dealers.

3. Central banks:

Another important player in the foreign market is Central bank of the various countries. Central
banks frequently intervene in the market to maintain the exchange rates of their currencies within
a desired range and to smooth fluctuations within that range. The level of the bank’s intervention
will depend upon the exchange rate regime flowed by the given country’s Central bank.

4. MNCs:

MNCs are the major non-bank participants in the forward market as they exchange cash flows
associated with their multinational operations. MNCs often contract to either pay or receive fixed
amounts in foreign currencies at future dates, so they are exposed to foreign currency risk. This
is why they often hedge these future cash flows through the inter-bank forward exchange market.

5. Individuals and Small Businesses:

Individuals and small businesses also use foreign exchange market to facilitate execution of
commercial or investment transactions. The foreign needs of these players are usually small and
account for only a fraction of all foreign exchange transactions. Even then they are very
important participants in the market. Some of these participants use the market to hedge foreign
exchange risk.
Factors affecting foreign exchange market

1. Inflation Rates

Changes in market inflation cause changes in currency exchange rates. A country with a lower
inflation rate than another's will see an appreciation in the value of its currency. The prices of
goods and services increase at a slower rate where the inflation is low. A country with a
consistently lower inflation rate exhibits a rising currency value while a country with higher
inflation typically sees depreciation in its currency and is usually accompanied by higher interest
rates

2. Interest Rates

Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates,
and inflation are all correlated. Increases in interest rates cause a country's currency to appreciate
because higher interest rates provide higher rates to lenders, thereby attracting more foreign
capital, which causes a rise in exchange rates

3. Country’s Current Account / Balance of Payments

A country’s current account reflects balance of trade and earnings on foreign investment. It
consists of total number of transactions including its exports, imports, debt, etc. A deficit in
current account due to spending more of its currency on importing products than it is earning
through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its
domestic currency.

4. Government Debt

Government debt is public debt or national debt owned by the central government. A country
with government debt is less likely to acquire foreign capital, leading to inflation. Foreign
investors will sell their bonds in the open market if the market predicts government debt within a
certain country. As a result, a decrease in the value of its exchange rate will follow.

5. Terms of Trade

Related to current accounts and balance of payments, the terms of trade is the ratio of export
prices to import prices. A country's terms of trade improves if its exports prices rise at a greater
rate than its imports prices. This results in higher revenue, which causes a higher demand for the
country's currency and an increase in its currency's value. This results in an appreciation of
exchange rate.

6. Political Stability & Performance

A country's political state and economic performance can affect its currency strength. A country
with less risk for political turmoil is more attractive to foreign investors, as a result, drawing
investment away from other countries with more political and economic stability. Increase in
foreign capital, in turn, leads to an appreciation in the value of its domestic currency. A country
with sound financial and trade policy does not give any room for uncertainty in value of its
currency. But, a country prone to political confusions may see a depreciation in exchange rates.

7. Recession

When a country experiences a recession, its interest rates are likely to fall, decreasing its chances
to acquire foreign capital. As a result, its currency weakens in comparison to that of other
countries, therefore lowering the exchange rate.

8. Speculation

If a country's currency value is expected to rise, investors will demand more of that currency in
order to make a profit in the near future. As a result, the value of the currency will rise due to the
increase in demand. With this increase in currency value comes a rise in the exchange rate as
well.

Foreign exchange quotes

There are three ways in which foreign exchange rates are quoted: (a) direct quote, (b) indirect
quote and (c) cross rate.
Direct quote: The quote is direct when the price of one unit of foreign currency is expressed in
terms of the domestic currency.
Example: Consider the example of the Indian INR (`), which we assume is trading at 74 to the
US dollar, In India, direct quotation is US$1 = INR ` 74
Indirect quote: The indirect when the price of one unit of domestic currency is expressed in
terms of foreign currency.
Example: Consider the example of the Indian INR (`), which we assume is trading at 74 to the
US dollar, In India, direct quotation is INR `1 = US$ 0.01351
Cross rate: A cross rate is the currency exchange rate between two currencies when neither are
the official currencies of the country in which the exchange rate quote is given. We can say the
cross rate is the currency exchange rate between currency A and currency C derived from
exchange rate between currency A and currency B and between currency B and currency C.
Example: Using mid-point exchange rate quotes, the mid-point cross exchange rate can be
derived using the following formula:

(A/C) = (A/B) X (B/C)

Where A/C is the exchange rate between A and C expressed as units of currency A per unit of
currency C and A/B and B/C are exchange rates between currnecy A and B and currency B and
C respectively.
Calculation

As at 27 December 2012, the exchange rate between Euro and US dollar is €0.75 per US$.
Exchange rate between US$ and Swiss Franc is 1.09 US$ per Swiss Franc. Find the exchange
rate between Euro and Swiss Franc in € per Swiss Franc.

Euro per Swiss Franc = €0.75 per US$ × US$ 1.09 per Swiss Franc = €0.8175 per Swiss Franc.

Finding the same exchange rate in Swiss Franc per Euro would involve taking a reciprocal of the
exchange rate calculated above. Swiss Franc per € exchange rate would be 1.223 Swiss Francs
per € (=1 ÷ (€0.8175 per Swiss Franc)).

SEGMENTS OF FOREIGN EXCHANGE MARKET

1. Spot Market:

In spot market currencies are exchanged immediately on the spot. This market is used when a
firm wants to change one currency for another on the spot. The procedure is very simple. A
banker can either handle the transaction for the firm or may have it handled by another bank.

Within minutes the firm knows exactly how many units of one currency are to be received or
paid for a certain number of units of another currency.

For instance, a US firm wants to buy 4000 books from a British Publisher. The Publisher wants
four thousand British Pounds for the books so that the American firm needs to change some of
its dollars into pounds to pay for the books. If the British Pound is being exchanged, say, for US
$ 1.70, then £ 4,000 equals $ 6800.

The US firm simply pays $ 6800 to its bank and the bank exchanges the dollars for 4000 £ to pay
the British Publisher.

In the Spot market risks are always involved in any particular currency. Regardless of what
currency a firm holds or expects to hold, the exchange rate may change and the firm may end up
with a currency that declines in values if it is unlucky or not careful.

There are also risks that what the firm owes or will owe may be stated in a currency that
becomes more valuable and, as such possibly harder to obtain and use to pay the obligation.

2. Forward Market:

Forward market has come into existence to avoid uncertainties. In Forward market, a forward
contract about which currencies are to be traded, when the exchange is to occur, how much of
each currency is involved, and which side of the contract each party is entered into between the
firms.
With this contract, a firm eliminates one uncertainty, the exchange rate risk of not knowing what
it will receive or pay in future. However, it may be noted that any possible gains in exchange rate
changes are also estimated and the contract may cost more than it turns out to be worth.

For example, suppose that the ninety-day forward price of the British pound is 2.000 (US$ 2.00
per £) or quoted £ 0.5000 per US $, and that the current spot price is US $ 1.650. If a firm enters
into a forward contract at the forward exchange rate, it indicates a preference for this forward
rate to the unknown rate that will be quoted ninety days from now in the spot market.

However, if the spot price of the pound increases by 100 per cent during the next 90 days, the
pound would be US $ 3.3000 and the £ 5,00,000 could be converted into US $ 1,650,000 The
forward market, therefore, can remove the uncertainty of not knowing how much the firm will
receive or pay. But it creates one uncertainty-whether the firm might have been better off by
waiting.

Functions of Foreign Exchange Market:

Foreign exchange market plays a very significant role in business development of a country
because of the fact that it performs several useful functions, as set out below:

1. Foreign exchange market transfers purchasing power across different countries, which
results in enhancing the feasibility of international trade and overseas investment.
2. It acts as a central focus whereby prices are set for different currencies.
3. With the help of foreign exchange market investors can hedge or minimize the risk of
loss due to adverse exchange rate changes.
4. Foreign exchange market allows traders to identify risk free opportunities and arbitrage
these away.
5. It facilitates investment function of banks and corporate traders who are willing to expose
their firms to currency risks.

EURO MARKETS

Prior to 1980, Euro currencies market was the only truly international financial market of any
significance. It is mainly an interbank market trading in time deposits and various debt
instruments. A “Eurocurrency Deposit” deposit is a deposit in the relevant currency with a bank
outside the home country of that currency.

Eurocurrency

Funds deposited in a bank when those funds are denominated in a currency differing from the
bank's own domestic currency. Eurocurrency applies to any currency and to banks in any
country. Eurocurrency is used in international trade and to make international loans.
The currencies involved in the Eurodollar market are not in any way different from the
currencies deposited with banks in the respective home countries. But the Eurodollar is, outside
the orbit of the monetary policy whereas the currency deposited with banks in the respective
home country is covered by the national monetary policy.

The Important Characteristics of the Eurocurrency market are the following:

It is an International Market and it is under no National Control:

The Eurocurrency market has emerged as the most important channel for mobilising and
deploying funds on an international scale. By its very nature, the Eurodollar market is outside the
direct control of any national monetary policy. “It is aptly said that the dollar deposits in London
are outside United States control because they are in London, and outside British control because
they are in dollars.” The growth of the market owes a great deal to the fact that it is outside the
control of any national authority.

It is a Short-Term Money Market:

The deposits in this market range in maturity from one day to several months and interest are
paid on all of them. Although some Eurodollar deposits have a maturity of over one year,
Eurodollar deposits are predominantly a short-term instrument. The Eurodollar market is viewed
in most discussions more as a credit market – a market in dollar bank loans – and as an important
accessory to the Eurobond market.

The Eurodollar Loans are Generally for Short Periods:

Three months or less, Eurobonds being employed for longer-term loans. The Eurobonds
developed out of the Eurodollar market to provide longer-term loans than was usual with
Eurodollars. A consortium of banks and issuing houses usually issues these bonds.

It is a Wholesale Market:

The Eurodollar market is a wholesale market in the sense that the Eurodollar is a
currency dealt in only large units. The size of an individual transaction is usually above
$1 million.

It is a Highly Competitive and Sensitive Market:

Its efficiency and competitiveness are reflected in its growth and expansion. The resiliency of the
Eurodollar market is reflected in the responsiveness of the supply of and demand for funds to the
changes in the interest rates vice versa.
ADVANTAGES OF EUROCURRENCY MARKET:

a. The growth of the Euro market has helped to alleviate the international liquidity
problems.
b. The market provided credit to finance the balance of payments deficits, enabled the
exporters and importers to obtain credit.
c. The market helped to meet the short-term credit requirements of the business
corporations.
d. And provided better opportunities for the investment of short-terms funds. It has provided
a market for profitable investment of funds by the central banks.
e. The supply of funds, by the Euro market has enabled commercial banks in some
countries to expand domestic credit creation and helped ‘window dressing’.
f. The Eurocurrency has helped to accelerate the economic development of certain
countries including South Korea, Brazil, Taiwan and Mexico.

Disadvantages of Eurocurrency Market:

a. The growth of this market has given rise to some serious problems, especially in the
sphere of monetary stability.
b. Central Banks and governments have been uneasy about the Eurodollar market ever since
it became visible in 1958. Its explosive growth baffles them, they know that something is
going on but they are seldom sure what it is.
c. They do know that one of its attractions for the participants is that the Eurodollar market
provides opportunities for avoiding many of the regulations that they try to enforce on
national money markets. Despite the many advantages of the Eurodollar as a vehicle
currency ‘ for carrying on world trade and as a source of international liquidity, there
remains the unsettling prospect of a machine, controlled by no one, that can add to the
world’s money supply by creating dollars.
d. The Eurodollar market has almost surely raised the world’s nominal money supply
(expressed in dollar equivalents) and has thus made the world price level (expressed in
dollar equivalents) higher than it would otherwise be.” The Eurodollar and Eurobond
markets have become important sources of finance for governments and private firms.

PARITY

Parity refers to the exchange rate between the currencies of two countries making the purchasing
power of both currencies substantially equal.

PURCHASING POWER PARITY

Purchasing power parity (PPP) is an economics theory which proposes that the exchange rate of
any two currencies will remain equal to the ratio of their respective purchasing powers.
Purchasing power of a currency is measured as the amount of the currency needed to buy a
selected product or basket of goods commonly available in different countries.

Purchasing power parity theory states that, in the long run, the price paid for a product in two
countries using different currencies will be same after the exchange rate differences have been
accounted for. This itself is based on the law of one price i.e. price of a given commodity is same
no matter what currency is used to purchase it.

It also suggests that a change in purchasing power of the two currencies will induce readjustment
of the exchange rate towards new equilibrium point.

Purchasing power parity assumes similar market conditions and absence of costs such as
transportation and duties etc.

Formula,

Let's say we have two currencies A and B. Then,

Under the purchasing power parity condition, it is expected that the currency exchange rates
which adjust between two markets such that the ultimate purchasing power of both currencies
will remain the same. There are two version of purchasing power parity: absolute purchasing
power parity and relative purchasing power parity. Following is the equation for forward
exchange rate based on relative purchasing power parity:

Where f and S0 are the forward exchange rate and spot exchange rate quoted with the domestic
currency as the price currency, id and if are the inflation rates in domestic country and foreign
country respectively and t is the time period involved.

Example

For the sake of simplicity we are going to ignore the bid-ask spread in the following example.
The price of a standardized basket of goods is 18,000 USD or 13,000 GBP. Let us test whether
purchasing power parity exists if the current USD/GBP exchange rate is 1.3800 USD.
The estimated exchange rate as per PPP is 1.3846 [=18,000/13,000], which is quite near the
1.3800 meaning that PPP exists. This example is just for understanding purpose only. Real life
spot rates may be quite different than the rate estimated using PPP because currency exchange
rates are determined by a number of market conditions.

INTEREST RATE PARITY

Interest rate parity is a theory proposing a relationship between the interest rates of two given
currencies and the spot and forward exchange rates between the currencies. It can be used to
predict the movement of exchange rates between two currencies when the risk-free interest rates
of the two currencies are known.

The interest rate parity attempts to forecast exchange rate based on the difference between the
risk-free interest rates in two markets. The premise is that the currency of the country which
offers higher interest rate should appreciate because there will be higher demand for that
currency. Following is the formula that can be used to work out forward exchange rate using
interest rate parity relationship:

Where f and S0 are the forward exchange rate and spot exchange rate (direct quote), r d and rf are
the risk-free interest rates in domestic country and foreign country respectively and t is the time
period.

Example

Suppose mid-market USD/CAD spot exchange rate is 1.2500 CAD and one year forward rate is
1.2380 CAD. Also the risk-free interest rate is 4% for USD and 3% for CAD. Check whether
interest rate parity exist between USD and CAD?

Solution:

Ratio of Forward to Spot

= 1.2380 ÷ 1.2500
= 0.9904

Ratio of Returns
= [(1+3%) ÷ (1+4%)]^1
≈ 0.9904

Since the two values are approximately equal, therefore interest rate parity exists.
COVERED INTEREST RATE PARITY

Covered interest rate parity refers to a theoretical condition in which the relationship between
interest rates and the spot and forward currency values of two countries are in equilibrium. The
covered interest rate parity situation means there is no opportunity for arbitrage using forward
contracts, which often exists between countries with different interest rates.

Example
Assume Country X's currency is trading at par with Country Z's currency, but the annual interest
rate in Country X is 6% and the interest rate in country Z is 3%. All other things being equal, it
would make sense to borrow in the currency of Z, convert it in the spot market to currency X and
invest the proceeds in Country X.
However, to repay the loan in currency Z, one must enter into a forward contract to exchange the
currency back from X to Z. Covered interest rate parity exists when the forward rate of
converting X to Z eradicates all the profit from the transaction.
Since the currencies are trading at par, one unit of Country X's currency is equivalent to one unit
of Country Z's currency. Assume that the domestic currency is Country Z's currency. Therefore,
the forward price is equivalent to 0.97, or 1 * ((1 + 3%) / (1 + 6%)).
Looking at the current currency market as of January 2019, we can apply the forwardforeign
exchange rate formula to figure out what the GBP/USD rate should be. The current spot rate for
the pair is 1.32. The interest rate – using the one-year LIBOR rate – for the U.K. is 1.17% and
3.029% for the U.S. The domestic currency is the British pound, making the forward rate 1.296:
Difference between Covered Interest Rate Parity and Uncovered Interest Rate Parity
Covered interest parity involves using forward contracts to cover exchange rate.
Meanwhile, uncovered interest rate parity involves forecasting rates and not covering exposure
to foreign exchange risk – that is, there are no forward rate contracts, and it uses only the
expected spot rate. There is no difference between covered and uncovered interest rate parity
when the forward and expected spot rates are the same.

FORECASTING EXCHANGE RATES

Since the advent of the flexible exchange rate system in 1973, exchange rates have become
increasingly more volatile and erratic. At the same time, the scope of business activities has
become highly international. Consequently, many business decisions are now made based on
forecasts, implicit or explicit, of future exchange rates. Understandably, forecasting exchange
rates as accurately as possible is a matter of vital importance for currency traders who are
actively engaged in speculating, hedging, and arbitrage in the foreign exchange markets. It is
also a vital concern for multinational corporations that are formulating international sourcing,
production, financing, and marketing strategies. The quality of these corporate decisions will
critically depend on the accuracy of exchange rate forecasts. Some corporations generate their
own forecasts, while others subscribe to outside services for a fee. While forecasters use a wide
variety of forecasting techniques, most can be classified into three distinct approaches:
• Efficient market approach
• Fundamental approach
• Technical approach
Efficient Market Approach
Financial markets are said to be efficient if the current asset prices fully reflect all the available
and relevant information. The efficient market hypothesis (EMH), which is largely attributable to
Professor Eugene Fama of the University of Chicago, has strong implications for forecasting.
Suppose that foreign exchange markets are efficient. This means that the current exchange rate
has already reflected all relevant information, such as money supplies, inflation rates, trade
balances, and output growth. The exchange rate will then change only when the market receives
new information. Since news by definition is unpredictable, the exchange rate will change
randomly over time. In a word, incremental changes in the exchange rate will be independent of
the past history of the exchange rate. If the exchange rate indeed follows a random walk, the
future exchange rate is expected to be the same as the current exchange rate, that is,

In a sense, the random walk hypothesis suggests that today’s exchange rate is the best predictor
of tomorrow’s exchange rate.

Fundamental Approach
The fundamental approach to exchange rate forecasting uses various models. For example, the
monetary approach to exchange rate determination suggests that the exchange rate is determined
by three independent (explanatory) variables: (i) relative money supplies, (ii) relative velocity of
monies, and (iii) relative national outputs. One can thus formulate the monetary approach in the
following empirical form:
Technical Approach
The technical approach first analyzes the past behavior of exchange rates for the purpose of
identifying “patterns” and then projects them into the future to generate forecasts. Clearly, the
technical approach is based on the premise that history repeats itself (or at least rhymes with
itself). The technical approach thus is at odds with the efficient market approach. At the same
time, it differs from the fundamental approach in that it does not use the key economic variables
such as money supplies or trade balances for the purpose of forecasting. However, technical
analysts sometimes consider various transaction data like trading volume, outstanding interests,
and bid-ask spreads to aid their analyses.
Examples of technical analysis
 the moving average crossover rule and
 the head-and-shoulders pattern

The moving average crossover rule

The above chart Illustrate how exchange rates may be forecast based on the movements of short-
and long-term moving averages. Since the short-term (such as 50-day) moving average (SMA)
weighs recent exchange rate changes more heavily than the long-term (such as 200-day) moving
average (LMA), the SMA will lie below (above) the LMA when the British pound is falling
(rising) against the dollar. This implies that one may forecast exchange rate movements based on
the crossover of the moving averages. According to this rule a crossover of the SMA above the
LMA at point G signals that the British pound may continue to appreciate. On the other hand, a
crossover of the SMA below the LMA at point D signals that the British pound may depreciate
for a while. For traders, crossover G , called the “golden cross,” is a signal to buy, whereas
crossover D , known as the “death cross,” is a signal to sell.

The head-and-shoulde rs pattern

The head-and-shoulders pattern is illustrated in Exhibit 6.12. The head-and shoulders (HAS)
pattern signals a reversal in an upward trending market. The HAS pattern consists of a head, two
shoulders, left and right, and the neckline (support level). This pattern is typically viewed as
signaling that the British pound is topping out and a major reversal is forthcoming. As the exhibit
shows schematically, the left shoulder occurs as the British pound reaches a local high point in a
rising market and then falls back to the neckline. The British pound then appreciates to an even
higher level, the head, before it falls back again to the neckline. The right shoulder occurs when
the British pound appreciates again but to a local high point lower than the head. The HAS
pattern is completed when the neckline or the support level is broken. This occurs when the
British pound depreciates through the neckline. The completion of the HAS pattern signals that
the British pound will depreciate significantly.