Foreign Exchange ates
One of the major complaints companies and individuals have with foreign exchange rates and flexible exchange rates is that they are too volatile because they float. Several factors contribute to the volatility of the rate of exchange. These include the balance of trade, currency substitution, the differential speed of adjustment of asset markets vs. goods markets, and the news. The balance of trade affects the exchange rate because countries are always shipping goods back and forth (O'Sullivan & Sheffrin, 2003). If a country really needs a particular good, it will be willing to pay more for that good than it would if it did not need the good as strongly. Countries that have more leverage from a trade standpoint can also affect the exchange rates, because the balance of trade is very different for countries that are strong than for countries that are weak when it comes…… [Read More]
temporal and current method for assessing translational exposure.
Translational exposure describes the risk that a company's assets, liabilities, income, or equities will change due to the exchange rate change results. This is a risk that has become more common in recent decades, as we have worked to deconstruct barriers to international trade. The translational exposure risk is usually as a result of a firm's denomination of their assets, liabilities, income, or equities in foreign currency and the need to project these various assets in advance. This need promotes the demand to assess translational exposure and make decisions according to this assessment. According to our readings, there are two methods for assessing translational exposure: the temporal method and the current method.
The temporal method is used by translating exchange rates which are consistent with the timing of an item's creation (Moffett, 2012,-page 280). This, of course, promotes a risk as pricing…… [Read More]
In addition, a series of joint ventures in which West German steel firms joined with East German firms and Krupp, Klockner, and Thyssen of Germany was pursuing other developmental initiatives in eastern Europe as well. Likewise, Arbed of Luxemburg was involved in steelmaking facilities in the former East Germany. According to Mangum et al., "The rising market for improved galvanizing for automobiles, appliances, canning, and other uses is producing a rash of joint ventures throughout the world. Some of these are internal to various countries and others involve international partners" (p. 74).
As a result, nearly 30% of the world's steel supply is now produced by plants belonging to companies that did not exist just 3 decades ago (Ahlberg, Pitkanen & Storsch 1999). As these authors point out, "Such upstarts have entered a global market that since 1980 has grown by less than 1% a year -- an average combining…… [Read More]
There are price differences between the U.S. And UK sites for Toys 'r' Us. One example is the animated Talking Ben stuffed bear, which sells for $9.99 in the U.S. And £21.99 in the UK. The equivalent U.S. price in the UK should be £6.56, so there is a substantial price difference on this product.
Consumers do not, however, have the right to demand equal prices. Each nation represents its own market, so the economic conditions for each nation will be distinct. There are significant differences in the costs that underlie each product on retail shelves that are reflected in the retail price. Thus, the conditions for each market are different and the result will be different prices. Goods can flow across borders, but that does not imply that there is a global market -- each local market has its own conditions.
Furthermore, retail prices for consumer goods…… [Read More]
country can interfere in the foreign exchange markets. In many cases, the motivation for doing so lies with propping up exporters, by lowering the value of the domestic currency. While this is the most common reason for currency manipulation, it is not the only one. In some cases, currency manipulation aids in the cause of making debt disappear, lowering the value of that debt in order that it might be paid back early. This paper will discuss some of the different ways that countries can affect their exchange rates.
A freely-traded currency should reflect the economic strength of a nation, in particular the expectations for future interest rates. Where expectations for future rates are relatively low, that means that the economy is expected to perform worse. This is the case for Japan. The country has adopted a policy recently of a low yen, in order to provide some spark to…… [Read More]
forward discount in predicting exchange rate modifications. The conclusion of the literature review is that the forward discount is a biased predictor and that are two possible explanations for this situation. One cause would be the presence of a time varying risk premium, and the other the failure of agents to make rational expectations (the inability to use all available information in an efficient manner).
The forward discount puzzle (as a predictor of exchange rate modifications) is a very discussed puzzle in the international finance literature, since its importance is quite high. As a result, numerous studies have concentrated on this issue, i.e. On the causes on the bias. Some authors (Fama, 1984), believe that this problem is traceable to the existence of a time-varying risk premium. Others connect it to learning effect (Lewis, 1989) or irrationality (Bilson, 1981) the "peso problem" (Krasker, 1980),
The "peso problem term" was introduced…… [Read More]
he currency in South Africa is the rand. he rand is a free floating currency meaning that there are few controls on the value of the currency. While the rand is a reference currency in the southern Africa region, it is not considered to be a "hard" currency. he performance of the rand against the USD in the past year is as follows:
he chart shows the downward trajectory of the rand against the dollar. A year ago, the rand traded at 7.73 to the dollar, and today it is 9.12, a decline of 18%. his bodes well for a manufacturing operation in South Africa, where the already-low labor costs would be decreasing over time. It does not bode well for selling in South Africa, however, as the country's currency continues to get weaker, which means profits from South Africa will be worth less in dollar…… [Read More]
Exchange Rate Crisis
Exchange rate crises are quite common phenomena in the economic world. From the 1994 Mexican crisis and the 1997 Asian crisis to the 1999 Argentine crisis, currency crises have occurred with a somewhat remarkable frequency. Also, known as currency crises or balance of payments (BOP) crisis, exchange rate crises occur when a country's monetary authority (central bank) has inadequate foreign exchange reserves to sustain its set exchange rates. This is usually caused by trade shocks, persistent budget deficits, foreign interest rate shocks, political uncertainty, banking system weaknesses, and moral hazard problems. An exchange rate crisis is often symbolised by factors such as hyper-inflation, banking crisis, devaluation, and economic recession, clearly indicating the dire consequences a currency crisis can have on the economy. More importantly, an exchange rate crisis can easily spread beyond the national boundary, underscoring the need for measures to prevent the crisis. This paper discusses…… [Read More]
Exchange Rate Volatility on Trade Flows
Exchange Rate Volatility
Impact on International Trade Flows
Exchange Rate Volatility
Impact on International Trade Flows
Trade Flow Responsiveness
The dissolution of the Bretton-oods system in 1973 introduced a new era for international markets. No longer would the exchange rates be pegged and fluctuating exchange rates changed the game for international trade and investment. The newly introduced increase in volatility in the foreign exchange markets also increases the risk of uncertainty for all international transactions. The floating rates produce new complexities that have implications for any individual or organization who buys sells, makes, or trades goods or currencies. These implications directly affect nation's balance of trade; however they also literally indirectly affect every individual's lives in one way or another.
The exchange rate volatility has had mixed theories produced by academia in terms of its effects on trade flows.…… [Read More]
fixed and floating exchange rates mechanisms are the exact opposites of one another, the advantages of one are generally the disadvantages of the other. Anyhow, in order to be able to evaluate for each case in part its positive and negative aspects, we should start with defining each, as most of the advantages and disadvantages derive there from.
The fixed exchange rate mechanism refers to a mechanism where "the government (central bank) sets and maintains the official exchange rate)
." The key word in this mechanism is pegging, which means that the currency has a price set against a major currency of the world and that the central bank ensures that this rate is kept throughout the entire period the currency is pegged.
The main advantage in this case refers to stability. Indeed, a fixed exchange rate mechanism helps eliminate or speculative activity on the respective currency. With no more…… [Read More]
Changes in the spot rate of exchange between two countries can occur as the result of a change in the relative interest rates in those countries, a change in the balance of trade between those countries and changes in the inflation rates in those countries (Van Bergen, 2015).
The two that are most closely followed are the differences in the interest rates, and the differences in the inflation rates.
A forward is a contract that is written between a party and a counterparty, to exchange currency in a set amount at a set rate in the future. This is proprietary between the parties. A future is publicly-traded. So while it also sets a future date and price for a currency, it is publicly traded, the dates do not change, and the amount is fixed -- to increase the amount you have to buy or sell more futures.…… [Read More]
exchange rate risk can be hedged. The current cost of the room is £50 per day, which is: 50 * 1.50 = $75.00. For a consumer, the easiest way to hedge this risk would be to purchase pounds today, so that the cost of those pounds is locked in. The transaction is a money-loser because of the time value of money, except that in this situation the nominal amount of pounds is locked in, so the nominal amount of pounds needed will not change. Only the opportunity to make interest on that money changes. For £50 and one year, this amount is negligible, but for larger transactions the time value of money is significant and important, making this an undesirable option.
If the transaction was larger, it could be hedged on the futures market or with interest rate swaps. A forward contract could also be purchased. Futures have a downside…… [Read More]
Theoretically speaking, there is only one factor affecting the exchange rate of a country adopting a floating exchange rate regime: the supply and demand of the respective currency on the international market. In this sense, if demand exceeds supply, then the value of the currency will go up and the respective currency will appreciate. On the other hand, if supply exceeds demand, the currency will depreciate and the price of the currency will decrease.
Starting from this statement, however, we can discuss several different factors that make the demand and supply vary, affecting thus the exchange. First of all, we have the level of the interest rate in a country. If the interest rates are higher, then foreign investors will choose to enter the national capital markets, purchase local currency and invest in local bonds or T-bills, which bring high returns, due to high interest rates. This mechanism will lead…… [Read More]
Managing Financial isk including Currency Exchange ate isks
Deere and Company are suffering as the string dollar is impacting negative on sales in the Euro zone. The firm is suffering not only due to the exchange rate, but also the high level of competition from other European firms that are operating in the Euro.
If companies operate across international boarders they will face risks associated with exchange rate movement. In the case of a strong home currency, this will make the goods more expensive to purchase if the pricing is based in the home currency. The basing of the price on the dollar, even if it is converted to Euro's effectively passes the risk to the purchaser. The impact can be the price becoming uncompetitive, especially when there are firms that are basing their pricing structure on the same currency as the purchasers.
The firm may deal with the…… [Read More]
Foreign Exchange isk Management
a) What are the causes of UK and Brazilian markets' revenues in Dollars being lower than expected?
One of the main causes of the revenue in dollars generated from the markets in Brazil and UK being lower than anticipated by the company is due to the depreciation of the countries' currencies against the U.S. dollar. Between January and September, the GBP constantly depreciated against the USD, an aspect that had not been anticipated by the financial team of the company.
b) How is the company doing in these markets?
The company is not operating well in these two markets as the revenues generated in the market have incessantly decreased in the nine months period. As the currency continue to depreciate against the dollar so has the expected revenue depreciated over the period.
c) Based on the given data, should it continue or cease the operations in…… [Read More]
The first step is setting up an investment account is to understand the client. Everything flows from this. The client profile is developed through an extensive interview process, wherein the advisor seeks to gain an understanding of the client's personal circumstances, current and envisioned financial situation, risk tolerance and investment knowledge (Anthony, 2011). With this information, the financial advisor can then build a profile based on the portfolio objectives and risk constraints. For this portfolio, the focus will be on exchange-traded funds. The objective of this exercise is to build the optimal portfolio for the client, taking into account the client's personal circumstances and the variety of funds that are available to build the portfolio.
The client is a male, late 20s, with a long-term girlfriend. They have no current plans for children. They are American, living and working in Miami, and therefore are eligible to purchase…… [Read More]
International Monetary System and Exchange ate Policies
A report/essay: chapter 17, multinational companies. select topic research write: Multinational vs. domestic financial management exchange rates international trade international monetary system exchange rate policies trading foreign exchange european monetary union interest
rate parity/purchasing power parity international capital structures.
The international monetary system and exchange rate policies
International Monetary systems
These are a set of rules and that regulate how international trade and payments are handled. It facilitates the exchange of capital, goods and services among countries. However, this system does not have a physical presence but, it consists of interlacing rules and procedures and is influenced by the market of foreign exchange. An example of an international monetary system is the International monetary fund. These interlacing rules and procedures are referred to as exchange rate Policies.
Exchange rate policies
These are rules that officials of public finance from different nations have developed…… [Read More]
Exchange ate Movements for the U.S. And Australian Dollar and Hedging
On the 9th June 2013 the initial $90,000 investment was worth $94,724.9. Knowing that the exchange rate on that date was AU $1.0525 to the U.S. dollar, meaning that U.S. $1 would purchase $1.0525, it is possible to determine that the total investment had purchased AU $99,697.96 (Oanda, 2013).
On the 7th June the exchange rate has changed to $1.1019, with the given fund value of AU $99,697.96, the change leaves a fund that is worth U.S. $90,478.23 (Oanda, 2013).
It is possible to look at the exchange rate movements over a period of time taking data from Oanda (2013). The tables below present that value for the last week, the last week of 2013 and the last week of 2011.
Table 1; Exchange rates for 1st - 7th July 2013
7th July…… [Read More]
Managing Exchange ate isk
For a number of multinational corporations, currency fluctuations can pose an extreme risk for them. This is because of sudden changes and dramatic amounts of volatility inside the marketplace can have a negative effect on their bottom line results. When this happens, there is a realistic possibility that these challenges could negatively impact their financial position and ability to compete inside many different markets. (Berger, 2011)
In the case of Fed Ex, the company has operations around the globe and is one the larger overnight package delivery services. This means that sudden shifts in the currency could negatively impact their earnings. To fully understand the overall scope and the way they are able to deal with these challenges requires focusing on how this impacts their operations, options financial managers can use to manage it and the benefits / drawbacks of these strategies. Together, these elements will…… [Read More]
The stability is evident in the statistics as well. Between 1880 and 1914, the golden age of the gold standard, inflation averaged 0.1%. Between 1946-2003, even with Bretton oods, inflation average 4.1% (Bardo, n.d.). Short-term price changes, however, could be highly unstable. This is a consequence of the fact that the gold standard ignores fundamental economic principles. Any system where the value of a good is established by artificial means is subject to such shocks. Another drawback to the gold standard is that it gives governments very little discretion over monetary policy. Another drawback is the cost of producing gold. The gold standard relies on having physical gold reserves. Thus, gold must be produced, and for that there is a cost (Ibid).
ith the decline of Bretton oods, the gold standard died. It was replaced by the modern foreign exchange system. At the core of this system are fiat currencies.…… [Read More]
That is supposed to have become one market which does not entail any tariff distinctions between the nations. But it should be noted that some of the analysts feel that it will never become a single entity market, but will remain separated into different varying national markets. The reason is being ascribed to "cultural, informational, logistic barriers and perhaps remaining discriminatory barriers all of which imply an incurable tendency to award contracts to local suppliers." (Is Culture a Major Barrier to a Single European Market? The Case of Public Purchasing)
The general aim of free trade has however changed and it is now not limited any more to the removal of barriers in being able to sell the products made in one country to other countries of the world. This is considered to be even more important for that of the developing countries wherein their progress in development made however…… [Read More]
Managing exchange rate risk can be a daunting task for many international firms attempting to expand overseas, acquire new companies, or simply manage its cash flows. Globalization has created a dynamic environment in which competition can arise to disrupt entire industries. Aspects such as technology, pharmaceuticals, banking, and automobiles have all experienced rapid change as a result of globalization and the competitive forces that underline it. As a result, companies, particularly smaller firms, have a higher propensity to experience volatile earnings overtime. Aspects that impact one sector of the globe can have a residual impact on other areas of the individual firm or industry. Managing exchange rates is therefore a viable option for firms to reduce volatility in earnings while subsequently managing its cash flows from operations. Below, is a 5 step program which could be implemented by a firm attempting to manage its exchange rate risk after an…… [Read More]
USD/CNY Currency Exchange elationship
The amount of money passing through a foreign exchange market was pegged at $4.0 trillion per day in April 2010 (Bank for International Settlements, 2010). Among the many currencies traded on the open market, the U.S. dollar (USD) continued to lead the pack by a wide margin; a full 84.9% of all trades involved the USD. By comparison, the Chinese currency (CNY) increased its share of the global FX market from 0.1 to 0.9% between April of 20004 and 2010. To better understand how trade with China impacts the exchange rate this essay will examine monetary policy for both countries.
USD/CNY Foreign Exchange Market
The sum of the current (CA) and capital (CAP) accounts will theoretically be zero if the exchange rate between two currencies is flexible (MacDonald, 2007, p. 7). Since M = + D, where M. is the base money supply, is the…… [Read More]
Transaction exposure risk may be defined as "cash flow risk" and is associated with the impact of FX rate moves on exposure due to transactional accounts, regarding exports, import or dividend repatriation: and FX "rate change in the currency of denomination of any such contract will result in a direct transaction exchange rate risk" (Papaioannou, 2006, p. 4), thus impacting the multinational corporation in terms of affecting the inflow and outflow of cash over a given period.
Translation risk may be defined as the FX rate risk associated with the balance sheet of a company's holdings. The notion is that exchange rates affect the value of a subsidiary in a foreign country and in instances where the subsidiary is consolidated to the parent balance sheet, the risk becomes translational. The way to measure this risk for a company is by assessing the net asset exposure and measuring it against…… [Read More]
It is likely that the retrieved results will indicate a cost of not hedging significantly larger than that of hedging.
Dozier Industries has a long standing tradition and a favourable reputation. The company worked mainly with the military, but also came to engage in civilian contracts. Having operated mostly nationwide, the UK-based company is now presented with the opportunity of conducting international activities. This however implies both benefits, as well as limitations.
A relevant limitation is given by the risks implied by the exchange rates, namely by their future and unknown fluctuations. This is the main reason why organizations choose to sign hedging contracts. The most common hedging alternatives are the forward, futures and option contracts. The option contracts are the most flexible ones, but they do present an additional risk for the seller, ergo employing the premium.
Despite the advances in the financial market, there still are…… [Read More]
Foreign Monetary System
A monetary system is any structure initiated by the government and mandated to issue currency, acknowledged as the medium of exchange by its citizens and governments of other nations. The central bank manages the monetary system of a country; this same bank has the responsibility of printing money and controlling the economy. Since the colonial period, coins from the European colonies had circulated in all the colonies. The Spanish coins gained dominance due to the scarcity of coins, during this time; the main form of trade was barter trade. The trade-involved items such as rice, tobacco, or animal skins, which took the form of money paper and notes, had varying rates of discount in different colonies rendering them of very low value (onald & Wright, 2006).
The high population in the U.S. called for increased trade and commerce. This forced the United States government to look for…… [Read More]
Foreign business environment: Columbia
A. What events (political, economic, and technological) are the most important in recent years that might have impacted the business culture in Colombia?
Individuals who perceive Colombia as still being paralyzed by crime networks and drug cartels are skeptical and bewildered by the notion of a confederation of politicians, business leaders, and academicians visiting the nation. However, in reality, the situation in Colombia is far different from what it was a mere ten years ago.
Colombia’s infamous cruel and powerful drug cartels emerged during the latter part of the seventies era and developed in the subsequent two decades. Specifically, the Cali Cartel and Pablo Escobar’s Medellín Cartel were politically, socially and economically influential in the nation in this period. During the last two decades of the twentieth century, the world regarded the nation as being well on its way to becoming a failure as a state.…… [Read More]
Governments neutralize the monetary impacts of their foreign exchange activities. This sterilization seeks to prevent foreign exchange transactions from posing as obstacles to the domestic monetary policy objectives. The underlying disturbance is likely to cause conflict between governments. When the underlying disturbance to exchange rate originates from the domestic government, it is likely to pursue inflation objectives through non-sterilized foreign exchange interventions (Auerbach & Kotlikoff, 2009).
While other governments have boundaries on investments relating to international financial markets in different currencies, some governments factor objectives of nominal exchange rates into their financial policy decisions. For instance, the federal government occasionally alters the rate of federal funds while it undertakes compatible foreign exchange activities. Erecting the required monetary policy changes across the sale or purchase of foreign currency has a bigger impact on the foreign exchange rate. This is contrary to initiating this move through open market activities in state securities.…… [Read More]
MNE Foreign Pricing, Profits
One of the most challenging areas of a multinational firm's business is setting target pricing and revenue for foreign markets, given the complications arising from currency denominations and exchange rates.
That is because exchange rates demonstrate the linkage between one nation and its partners in the global marketplace. They affect the relative price of goods being traded (exports and imports), the valuation of assets, and of course the final economic yield on those very assets.
In the period of fixed or constant exchange rates these prices, values, and yields were predictable over time. However, since 1973 we have been living in a world of flexible rates where foreign exchange markets determine these rates based on trade flows, interest rate differentials, differing rates of inflation, and speculation about future events.
Exchange rates can be expressed as the foreign price of a domestic currency (i.e., the Euro price…… [Read More]
In a sense, a foreign acquisition target is assessed in much the same way that any other target would be, but the specifics of the evaluation may differ. All acquisitions must be priced, and this price needs to take into account all of the different risks. The difference with foreign acquisitions is that the risks are going to have different weights. For example, there is little incremental political risk involved in a domestic acquisition, but there is with an international one. Sometimes, there is a lot of incremental political risk. Foreign acquisitions will typically involve foreign exchange rate risk, to a higher degree than the firm currently faces. Post (2006) notes that there are often risk premiums associated with foreign acquisitions, and these risk premiums can increase the price and reduce the return
So because the risk profile of international acquisitions is different, the hurdle rate for such…… [Read More]
U.S. Department of Commerce
South Africa’s population of 50 million enjoys the most sophisticated, mature and productive economy on the African continent today (U.S. commercial service, 2014). The country’s GDP represents approximately 33 percent of the sub-Saharan total and the South African economy has experienced sustained growth of 3.2 percent over the past 5 years (US commercial service, 2014). According to the U.S. Department of Commerce, “The U.S. Commercial Service in South Africa is co-located with the U.S. Consulate General [with the] mission to create jobs in the United States by advancing commercial opportunities in South Africa and strategically assisting firms export U.S. products and services” (U.S. commercial service, 2014, para. 2).
World Trade Organization
The World Trade Organization’s (WTO’s) most recent policy review (2008) shows that during the period from 2003 through 2008, the percentage of trade in goods and services to South Africa’s GDP rose from 53.8% to…… [Read More]
S. billion in 1998. eported as the dominant source of inward FDI in China is that of Hong Kong, followed by Japan, the U.S. And Taiwan.
Summary and Conclusion
This study set out to examine Foreign Direct Investment in China by the multinational enterprise. At present China is a primary source for foreign direct investment due to the favorable laws and regulations governing Foreign Direct Investment in China and the attempt to make location siting of the organization equitable and fair. China has been attempting to pull the company in line with their own expectations as have the multinational enterprises who desire to directly invest foreign funds into China.
Investment (2008) Multinational Corporations. Cush & Wakefield. etrieved from: http://www.cushwake.com/cwglobal/jsp/audienceDetail.jsp?audienceId=18&Country=900095&Language=EN&groupBy=audience
Kroll, CA and Bardhan, a. (2007) Globalization and the eal Estate Industry: Issues, Implications, Opportunities Haas School of Business, UC Berkeley, Paper Prepared for the Sloan Industry Studies Annual Conference.…… [Read More]
19). The family-friendly atmosphere at the company's restaurants has also been conducive to its growth, as well as Applebee's combination of good food and alcoholic beverages. For instance, Crandall and his colleagues suggest that the casual dining nomenclature ". . . includes such settings as Applebee's where the food comes with a relaxed atmosphere. The concept here is 'not-so-fast' food for aging boomers who may still crave a burger but now want to sit down and eat it from a plate, perhaps with a glass of wine" (p. 19). The company has a proven track record of success in its foreign markets, making further expansions a viable proposition as discussed further below.
Identification and Discussion of Potential Foreign Market and Proposed Entry Strategy
In general, companies have a wide range of entry strategies available to enter foreign markets, including using company-owned restaurants that use locally hired managers or franchises (Prater…… [Read More]
Discussion. Translation risk is one of the most difficult risks to address. The company can adopt specific strategies to reduce its exposure to specific risks, for example partnering with a local firm to reduce governmental risk. Dealing with broad-based country exposure and by extension translational risk, however, is more complicated. One of the best ways to approach the issue is through diversification. For larger countries, however, it may be difficult to deal with exposure.
The best approach to unhedgeable translational risk is to ensure that adverse currency movements are not going to do significant damage to the company. The company's balance sheet should be far from loan covenants (Amin, 2006). The company should be able to explain to shareholders if translation impacts more than a few cents per share. If this is not the case, then the company needs to find ways to hedge that translational risk by earning extra…… [Read More]
4 trillion to about $5 trillion dollars at the end of 2008 to support a rise in U.S. net external debt from $3.3 trillion to $7.4 trillion. (Ibid. 6) Continued financing of the U.S. trade deficits by the rest of the world is also not without its long-term problems: the U.S. would accumulate so much debt over time that the ultimate cost of adjustment would become too high for the U.S. economy. Hence, all indicators regarding the sustainability of the U.S. trade deficit are blinking red, despite the brave face that the Bush administration puts on the issue.
Is China the Source of the Deficit Problem?
The U.S. administration believes that the alleged under-valuation of the Chinese Yuan is the source of its deficit problems since there is a huge and growing trade imbalance between the U.S. exports and imports to China. The U.S. Senate recently passed a bill, threatening…… [Read More]
In November of 2012, the International Monetary Fund (IMF) announced that the Australian and Canadian dollars would be added to its list of reserve currencies. This status is the highest for any currency, and implies that the currency is a very reliable store of value. A reserve currency is backed by a nation's assets, like any fiat currency, but with reserve currencies there are also the conditions of good governance, economic diversification, free float and other such attributes that define the world's strongest and most widely-traded currencies. These are also currencies that are traded widely in their regions -- the Australian dollar is a reference currency in the South Pacific -- and they are held by foreign central banks as part of those banks' currency portfolios. The relative strength of the AUD and CAD has been cited as the reason for those currencies' popularity with central bankers, and…… [Read More]
Federal Funds Rate
The federal fund rate was part of the solution, comprised in the Federal Reserve Act of 1913, to centralize the banking system and gain public control of the money supply, inflation, and economic growth. The banking crisis of 1907 was a result of decentralized, unregulated banking that caused confusion with private bank notes being used as currency. There were occasional episodes of monetary mismanagement where the money supply was not appropriate to fulfill the needs of the economy. Too much money caused rapid inflation where too little money stunted economic growth by hindering production and the exchange of goods and services. There were no nationally consistent banking policies and no one entity had control to implement policies until the Federal Reserve Act of 1913 became a national law.
The Federal Reserve System was created with the Federal Reserve Act of 1913 with a oard of Governors to…… [Read More]
Trade Act of 1974 on Euro exchange rates?
Free Trade has been a key agenda for the past three presidents. In an expanding global market, tariffs and trade policies are more important today than they have been in the past. More and more countries are forming alliances such as the North American Free Trade Agreement (NAFTA), the Asian Alliance, and the European Union (EU). These trade agreements are meant to level the playing for all countries, both industrialized and emerging countries.
President Bush's trade policy is aimed at helping to generate American jobs, open markets to American products, and provide economic growth. Sometimes massive increases in imports can have a devastating effect on U.S. industries. [This has been the case for the U.S. steel Industry and is the issue addressed in Section 203 (B) (1) of the Trade Act of 1974. Foreign steel makers have had the luxury of government…… [Read More]
popularity of foreign restaurant: consumer attitude and behavior toward foreign cuisines in Bangkok
Thailand as a tourist destination
Thailand has become a tourist destination hotspot for its scenic beauty, the humble nature of their people, and the relative value of foreign currencies relative to the baht. According to EIU ViewsWire (2003), "Growth in the tourism industry in recent years was the result of the depreciation of the baht against non-Asian currencies (which improved competitiveness relative to destinations outside the region), aggressive marketing campaigns and an increase in the number of airlines offering flights to Thailand." (EIU ViewsWire, 2003)
Additionally, according to EIU ViewsWire (2003), "Tourist arrivals rose by 5.8% to just over 10m in 2001, despote the global economic downturn and the September 11 terrorist attacks in the U.S., bringing in Bt 295bn (U.S. $6.6 bn) in revenue. Thailand benefited from its reputation as a safe and stable society and…… [Read More]
China announced on Oct. 28, 2004 the first interest rate rise in nine years. In this manner, Beijing is showing its willingness to adopt additional market-oriented reforms in order to have a tighter macro-economic control on the already overheated economy. Although the news regarding the evolution of the Chinese interest rate were contradictory, it would appear that North American economists are welcoming this interest rate increase.
The Chinese economy is rapidly becoming one of the most important in the world, with an annual 8% growth-rate, constant expansion in the preceding years and a history of twenty years of economic reforms. The global economy and especially neighboring countries such Taiwan and Hong Kong are feeling the pressure of the Chinese machine. Investors have made public their fears, since April 2004, that the economy will overheat and are now expecting the austerity measures by the Government to slow the growth and provide…… [Read More]
In the contemporary financial environment, individuals who deposit money in the banks earn interest from their deposits. Similarly, commercial banks also receive interests from lodging funds with central banks. In other words, banks compensate savers by adding some percentages of the amount saved in the banks. In a sense, savers are lending their money to banks in order to be used elsewhere. In return, banks compensate savers interest incomes. Meanwhile, the interest rates are quoted as APY (annual percentage of yield) and savings account earns 3% APY. However, negative interest rates reverse this arrangement where savers or depositors are obliged to pay banks for holding their money. Moreover, central banks penalize commercial banks for depositing their funds with them. For example, The ECB (European Central Bank), some smaller European banks, and Bank of Japan have introduced the negative interest rate policy where banks, as well as other financial institutions, will…… [Read More]
risk that Apple Inc. faces with respect to its international economic exposure. Apple designs its products in the United States, manufactures them in China and then sells them all over the world. In order to analyze this exposure, a number of steps will be undertaken. The first step will be to provide an overview of the business, what its foreign exchange exposure is, and how the company manages that foreign exchange rate risk. The subsequent sections will discuss the degree of exposure that the company has to other forms of international risk -- economic risk in particular. There will be an industry and company analysis to provide a framework for this discussion of risk. There is also going to be a discussion of how the company manages the different risks to which it is exposed, and what the analysts' views of this exposure are as well. The final component of…… [Read More]
Policies need be established that dictate how currency is used (Homaifar, 2003).
Trends in international banking suggests that within Europe while the euro may still be the standard currency used, often throughout the world and in international banks generally, much of currency is denominated in the form of dollars (Bertuch-Samuels & amlogan, 2007; Homaifar, 2003). The United States dollar has represented the gold standard among international financial institutions because the U.S. has relatively little exchange rate fluctuation, which lowers the potential risk within the international financial marketplace. To gain operational independence and affirm prices will remain stable, banks want to ensure the currency they use is issued in a country that is stable and holds prestige (Homaifar, 2003). This can easily be assessed by evaluating a country's financial systems, determining whether the banking systems are strong and offer policies and provisions for conducting business using foreign currency as well as…… [Read More]
Coca-Cola Company ("Coca-Cola," "Coke") is a U.S.-based manufacturer and distributor of non-alcoholic beverage. The company recorded revenue of $46.5 billion in FY2011, and earned $8.5 billion in net income. According to the company's website, it sells products in over 200 countries, given the company near-global scope. This also ensures that Coca-Cola has substantial exposure to foreign currencies. This report will discuss a number of international financial aspects to Coca-Cola's business, including foreign currency risk and capital structure.
As Coca-Cola operates in just about every country in the world, there are a very few options for international expansion. The company's Mexican subsidiary is already exporting to Cuba, circumventing Helms-Burton. However, there remains one country where one cannot currently buy a Coca-Cola product, and that is the Democratic People's Republic of Korea (DPRK), or North Korea (Hebblethwaite, 2012). There is increasing wealth in that country, however, as the result of Chinese investment.…… [Read More]
U.S. Macro economy
economy which was considered to be the world's largest has still not been able to recover completely from the financial crisis and resulting recession that hit in 2008. At the national level, spending increase to more than 25% of GDP in 2010, later in 2011 gross public debt exceeded 100% of GDP. The process of recovery for U.S. economy in the first quarter turned out to be weaker than expected. From January through March, the gross domestic product (GDP) of the nation grew at a 1.8% annual rate. The economy of U.S. has grown for 15 consecutive quarters; however the pace of those gains was about 2% which was actually in the weakest recoveries since World War II. U.S. economy is being held back by its tightening fiscal policy. In this year, the spending cuts are estimated to be $85 billion and expected to grow to $109…… [Read More]
individuals are knowledgeable about macroeconomics. It is a huge and potentially difficult subject to understand, and yet its constructs intimately affect each and every aspect of our lives. To show that this is so, I plan to explain some of the factors of the current state of the U.. macro economy so that we can gain a better understanding of their implications. I will address this topic by posing four of the most popular questions and answering them by connecting them to our situation.
What happens when there is a surplus of imports brought into the U.. Cite a specific example of a product with an import surplus, and the impact that has on the U.. businesses and consumers involved.
When imports are greater than exports, the United tates is said to have a balance of trade deficit. An example may be of the surplus of ony electronics that are…… [Read More]
Capital Budget Processes and Techniques
People often ask what happens when there is a surplus of imports brought into the U.S. Many think that we just have more of what we brought in to be able to hang on to and sell at a later date but that is not the case. When there is a surplus of the products that have been brought in then the price of what the surplus is will drop. Unlike when there just isn't enough for the demand for the product then the price will raise. The reason that the price will drop is due to the products already have been paid for and now they are storing the products which cost money.
When the price is dropped then this allows for the product to be moved quickly and make room for more product and different kind of product. By doing this the price…… [Read More]
What is Money?
Money is anything that is accepted as a form of payment and in the modern world this typically currency. Today's currency is essentially created by governments, and backed by their ability to tax. Thus, money today derives from both the legitimacy of the state and from the revenues of the state. Money is typically issued by a central bank, and it has considerable leeway with respect to how much money it issues. The value of money is determined by the supply of and the demand for money.
The supply of money is controlled, as we've said, by the central bank. Demand for money is based on the need for that currency to make transactions. So demand for Japanese yen is in part related to how much yen people need to buy goods and services from Japan. The same is true of all currencies, including the U.S.…… [Read More]
Foreign Policy of China (Beijing consensus)
Structure of Chinese Foreign Policy
The "Chinese Model" of Investment
The "Beijing Consensus" as a Competing Framework
The U.S.-China (Beijing consensus) Trade Agreement and Beijing Consensus
Trading with the Enemy Act
Export Control Act.
Mutual Defense Assistance Control Act
The 1974 Trade Act.
The Operational Consequences of Chinese Foreign Policy
The World Views and China (Beijing consensus)
The Managerial Practices
Self Sufficiency of China (Beijing consensus)
China and western world: A comparison
The China (Beijing consensus)'s Policy of Trading Specialized Goods
The versions of China (Beijing consensus)'s trade development
The China (Beijing consensus) Theory of Power Transition
Foreign Policy of China (Beijing consensus)
ACD arms control and disarmament
ACDA Arms Control and Disarmament Agency
ADB Asian Development Bank
ADF Asian Development Fund
APEC Asia-Pacific Economic Cooperation
AF ASEAN [Association of Southeast…… [Read More]
Discuss some of the motivations firms have for setting up production facilities in other countries. Will the effect on the host country differ depending upon the motivation? Explain. Will the effect on the source country differ depending upon the motivation? Explain. What relationship might trade barriers (or the lack of trade barriers) have in determining a company's primary motivation for producing abroad?
The reasons for the foreign investment are high profit returns, and the rate of return is dependent upon the capital invested, the tax reductions and employees' fund. The foreign investment or production company is highly welcomed by the government because the company is expected to bring in foreign exchange. THz enhances the purchasing power of the country in international currency; thereby the nation has to rely minimum on loans and international borrowing.
The major motivation that the international investor has towards foreign investment is that cheap labor…… [Read More]
Most developed economies, however, allow the market to set exchange rates, only influencing currency values through indirect means such as the increased or reduced sale of bonds to foreign entities and individuals, or through other means of international wealth exchange. Essentially, all manipulations of exchange rates and actions based on predictions of exchange rates are focused on the forward exchange rate, or the predicted rate of exchange between two currencies at a future point in time.
The spot exchange rate, on the other hand, is the rate of exchange at the current moment in time. It is through a comparison of the spot rate and the forward rate of exchange -- inasmuch as it can be predicted with any accuracy -- that companies and businesses make decisions that affect either the exchange rate itself (in the case of some governments, notably China in the modern period), or more often make…… [Read More]
Bernstein, J., Gubsky, A., and Yudin, . Under the Roof, The Moscow Times. (1995), section 830.
Fielding, David. (2000). Can olitical Instability Generate Business Cycles? Evidence from the Intrifada. Retrieved 9-23-05 from unknown. Website: http://www.le.ac.uk/economics/research/ReEc/lec/lesson/econ00-9.pdf
Hong, Jung Hwa, Jones, eter, and Song, Haiyan. (1999). olitical Risk and Foreign Investment Decision of International Hotel Companies. Retrieved 9-23-05, from Hotel.Online. Website: http://www.hotel-online.com/Trends/anAmerroceedingsMay99/olRiskInvestHotels.html
Hubbard, Joan C. (1997). Doing Business in Moscow: Threats and Opportunities. Retrieved 9-23-05, from B>Quest. Website: http://www.westga.edu/~bquest/1997/moscow.html
What factors contribute to the fluctuation of exchange rates?
In every currency transaction there are risks due to fluctuations on the realized value of such transfers. Many different factors contribute to the fluctuations of exchange rates. There are economic factors, political factors, and psychological factors to consider. Consumer driven supply and demand plays a part in the fluctuations that take place in the currency market. Another important contributing factor when dealing with foreign…… [Read More]
Doing business overseas requires a number of strategies to manage foreign exchange rate risk. One of those techniques is the interest rate swap. A swap can also be used for domestic transactions as well. An interest rate swap is "an agreement between two parties to exchange one stream of interest payments for another, over a set period of time." There are several types of swaps. The main type is the plain vanilla swap. This type of swap consists of a fixed rate payment being exchanged for a floating rate payment. The two counterparties must come to an agreement over the rates to be paid. The counterparties are usually a corporate customer and a bank that acts as the market maker (Johnson, 2011). The counterparties typically engage in swaps to lower their risk (Loeys, 1985).
Swap pricing also tends to reflect comparative advantage. If a counterparty received no advantage from…… [Read More]
South Coast Railway is evaluating a proposal for a five-year franchise from the UK government. This proposal would be to operate a high speed commuter rail service from 2018 to 2022. The following report will examine the financials relating to this decision, and the decision-making heuristic.
The decision at hand is essentially a capital budgeting decision. There are a few different ways to evaluate a capital budgeting decision. The most common is the net present value (NPV) technique. This relies on discounted future cash flows to make the decision. The principle behind the use of discounted cash flows is that money earned today can be reinvested, and because of that, a pound earned in the future is inherently worth less than a pound earned today. The value of future money decreases over time. The NPV method discounts those future cash flows back to present value, and compares then…… [Read More]
In many countries, FedEx Express charges a fuel surcharge. In foreign countries, an increase in the value of the U.S. dollar is inherently built into the price of jet fuel, or even into the price of gasoline. As such, a fuel surcharge helps to offset the currency impact on the local price of jet fuel. The result is that it serves as something of a hedge, pushing this particular risk at least in part onto its customers.
FedEx Express conducts as much of its business as possible in U.S. dollars. In particular, the company's major cost drivers in U.S. dollars. The foreign currency that is not reinvested into foreign subsidiaries may be repatriated to the U.S., or invested in other areas of the world. Despite its global footprint, FedEx Express therefore is well-hedged operationally against fluctuations in the U.S. dollar. Canadian dollar surpluses, for example, have been used to make…… [Read More]
isk Analysis Financial Markets Main Techniques isk Analysis
isk analysis in the financial markets
This essay mainly intends to outline and explain the objective of risk analysis in the financial market and the main techniques used in risk analysis. In a bid to answer this question the study will first of all include a summation of the types of risks that are found in the financial markets. The financial market here has been classified into three groups that are; the stock market where company stock and shares are traded, the bond market where the Australian government usually sell its' treasury bills and bonds and lastly the international financial market.
Different risk analysis technique will spelt out in the two markets and then the objectives of risk analysis will then be mentioned before the essay concludes.
Types of risk in the financial markets
In his studies Jensen (2009) noted that there…… [Read More]
Strength of U.S. Dollar in elation to the Exchange ate.
There is no question that most people consider a "strong dollar" to be an overall good thing. After all, it just feels good to change one's U.S. dollars for Canadian ones, for example -- it makes one feel ahead of the game before setting foot outside of the exchange building. However, as joyful as one might feel in the initial stages of shopping euphoria when abroad in a weaker currency climate, the reality of just what that strength really means is a bit more complex.
When the U.S. dollar gains strength, its value rises in comparison to other currencies. Of course, at least on some levels, and in broad terms, this results in the ability of American dollar holders to buy an increased amount of a given foreign currency -- which in turn results in a drop in overall prices…… [Read More]
Euro before Brexit has maintained a higher value than the dollar since its creation. However, post-Brexit it depreciated slightly from 0.9109 and now stands at 0.88260 compared to the U.S. Dollar value of 1, meaning it appreciate in value within the time span of one month. The Australian Dollar has maintained a lower value than the U.S. Dollar. However, in the month of August it hit a dip of 1.29, appreciating in value. The same thing happened to the Canadian Dollar, which has always had lower value than the U.S. dollar but saw an increase in value going down to 1.28637 from 1.3212. The Japanese Yen took the same route appreciating in value from 106.55 to 100.18. The same as well for the Chine Yuan which started in July with 6.68 and now stands at 6.64879.
In regards to 4 years ago, the euro maintained a similar value at 0.82.…… [Read More]
derivatives in general and discusses their use by olls-oyce plc in its risk management programme.
Derivatives derive their value from an underlying financial instrument and as such, they allow a way of accessing and trading in the value of the underlying instrument without needing to put up the full value of that underlying instrument. Derivatives can be used for a number of purposes, including leverage, hedging, income generation and profiting from long and short positions (Wise Owl, n.d.).
Companies like olls-oyce use derivatives for hedging risk, allowing them a form of insurance. Typically companies use derivatives as a tool within a risk management program. ecent research shows that more than 90% of large U.S. companies use derivatives regularly (Brigham and Houston, 2009, p. 581). Hedging allows managers to focus on running their core businesses without needing to worry about variability in interest rates, currency, and commodity prices.
olls-oyce uses hedging…… [Read More]
Walt Disney Company
When Walt Disney returned from work with the ed Cross during World War One, his brother got him a job at a Kansas City art studio, and he started to experiment with animation. He and his partner made a deal with a local movie theater to run their cartoons, and the popularity of these allowed Disney to create his own studio. After losing the rights to many characters, Disney pursued the Mickey Mouse character and the third Mickey Mouse film, Steamboat Mickey, was an instant success. Many of the famous friends were created shortly thereafter. The company's first feature was Snow White and the Seven Dwarves in 1937, and it was an incredible hit, allowing the studio to produce a string of other now-classic films (Biography.com, 2017).
The company expanded into television and by 1955 it had opened a theme park. Disney has since evolved into an…… [Read More]