Essay On How Exchange Rates Influence The Activities Of Domestic And International Business

Before we look at these forces, we should sketch out how exchange rate movements affect a nation 's trading relationships with other nations. A higher currency makes a country 's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country 's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country 's balance of trade, while a lower exchange rate would increase it.

When an input (machinery, components, capital, labor, etc.) is denominated in a foreign currency, the risk exists that an unfavorable exchange rate movement will increase the cost of doing business. When the products are priced and sold in a foreign currency, an adverse exchange rate movement will make the product appear more expensive to consumers, decreasing demand or forcing the company to reduce its own profit margin to maintain lower price levels. For companies with integrated international business systems, an exchange rate shock can literally force them out of business, with their operations experiencing pressures from both cost and profit centers.

Exchange rates play a pivotal role in the relationships between individual economies and the global economy. Almost all financial flows are processed through the exchange rate, as a result the movements and fluctuations of the exchange have a significant impact on international competitiveness, trade flows, investment decisions and many other factors within the economy. Due to the increasing globalisation of the world economy, trade and financial flows are becoming more accessible

INTERNATIONAL FINANCE ASSIGNMENT 2 _ Answer Key PROBLEM I (30 points) Suppose the quarterly (90-day) interest rate in the US is 2.5% and it is 4% in Canada. If the $/CD spot exchange rate is $0.80/CD and the 90-day forward exchange rate between US and Canadian dollars is $0.79/CD , does the interest rate parity (IRP) hold? Why or why not? If it does not hold, what is the direction of the capital flow?

Over the past decade, the Australian dollar has devaluated strongly against the US dollar. Especially in the second half year of 2014, the Australian currency losing around 14 per cent of its value against the US dollar and almost as much against the Chinese RMB (Dixon, J 2015). After the devaluation of Australian dollar, several results would both have positive and negative influences on Australian multinational corporations (Faff, R 2000). It would cause: reduce imports and increase exports, domestic employment opportunities, reduce unemployment, domestic consumer goods prices, stock prices and house prices fell, not conducive to go to study abroad and rising gold prices. More specifically, the impact would explain in the following:

When the firm exports to the other nation, there are several risks that they should concern about. The fluctuation of currency exchange rate is the primary issue. When the domestic exchange rate is depreciated, it is the great opportunity to export more to the other foreign nations. However, when it gets appreciated, it will increase the price of the product for the foreign customers. It will lead the decline of export to the other nation due to lack of attractiveness to import from foreign countries. It happened to the Deere & Company in 2015. The U.S. dollar was depreciated during 2013 to 2014, which attracted other nations to import their products. However, once it got appreciated, their export has declined substantially. It also let declines of stock

During the second half of 1997, currencies and stock market prices plunged in value across Southeast Asia, beginning in

- For the foreign producers, when their currency weakens, production becomes cheaper (especially if they have currency reserves in dollars), and their sales go up, since the weaker currency is more attractive to foreign buyers.

Currency fluctuations are the result of floating exchange rates. This can a negative or positive outcome for the company. This is mainly due to supply and demand factors in each individual market. In many instances nations can adjust their exchange rates. A common fallacy that most people harbor is that a strong domestic currency is a good thing (“The effects of currency fluctuations on the economy, “2013) this might seem like a good thing, but it can hurt the company in the long run.

However, speculation can only be expected to smooth exchange rate movements if underlying economic processes are relatively stable. If there is a great deal of uncertainty over future government actions and their economic impact, expectations will not be strongly held. Thus expectations can change dramatically from day- to-day, leading to rapidly fluctuating exchange rates.

Exchange rate has given both positive and negative impact towards foreign direct investment (FDI). If foreign direct investment (FDI) in that country is export substituting, the increase in exchange rate volatility between headquarters and the country that allow foreign direct investment (FDI) induce a multinational to serve the host country via a local production facility rather than exports, thereby insulating against currency risk. According to Osinubi (2009), direct investment in a country with a high degree of exchange rate volatility will have more risky of profits which indicates negative impact of exchange rate towards foreign direct investment

Economical - the economy is a huge factor in this business which affects the current exchange rates. When the economy is good and the dollar is high and exchange rates good customers are more likely to spend more or buy currency for future travel. When the dollar is low and exchange rates low customers are less likely to buy more then they need or will try to negotiate or shop around for better rates. When customers do this, it means the company makes a smaller margin on the exchange rates and less profit.

Economic and the currency: first of all, every business is trying to avoid risk, therefor, the economic status of a foreign country is what the company looking for, they want the low unemployment rate, inflation rate and stable economic environment. Furthermore, the currency difference will change the product price strategy.

Hedging is a form of the method of dealing with the exchange rate to reduce the inevitable loss of profits, in simple terms, it is an insurance policy strategy (Shackman, 2015). Therefore, the leadership of the firm must account for the risk management hazards and develop its overall business

Exchange rate represents the external value of a currency. Changes in exchange rates may affect the relative position of a country in the international trade. Politicians and economists concern about exchange rate variability for lots of reasons, among which that the exchange rate variability discourages trade comes first. However, a large empirical literature on this issue does not confirm a significant effect of exchange rate on the volume of trade [1]. Instead other variables such as employment should be much more important from a practical point of view, for it is closely related to people’s livelihood.