1. List two reasons a global company needs foreign exchange. 2. Why is Walmart concerned about foreign exchange rates? However, Chinese exporters, those businesses that sell goods and services to foreign buyers, find thatsales increase because their prices are cheaper or lower for the foreign buyers. Economists say that theChinese government has intervened to keep the renminbi cheap in order to keep Chinese exports cheap:this has led to a huge trade surplus with the United States and most of the world. Each country tries topromote its exports to generate a trade advantage or surplus in its favor. When China has a trade surplus,means the other country or countries are running trade deficits, which has "become an irritant to a lot ofChina's trading partners and those who are competing with China to sell goods around the world."Saylor URL: http://www.saylor.org/booksSaylor.org316For Walmart, an American company, a cheap renminbi means that it takes fewer US dollars to buyChinese products. Walmart can then buy cheap Chinese products, add a small profit margin, and then sellthe goods in the United States at a price lower than what its competitors can offer. If the Chinese RMBincreased in value, then Walmart would have to spend more US dollars to buy the same products, whetherthe products are clothing, electronics, or furniture. Any increase in cost for Walmart will mean an increasein cost for their customers in the United States, which could lead to a decrease in sales. So we can see whyWalmart would be opposed to an increase in the value of the RMB.To manage this currency concern, Walmart often requires that the currency exchange rate be fixed in itspurchasing contracts with Chinese suppliers. By fixing the currency exchange rate, Walmart locks in itsproduct costs and therefore its profitability. Fixing the exchange rate means setting the price that onecurrency will convert into another. This is how a company like Walmart can avoid unexpected drops orincreases in the value of the RMB and the US dollar.While global companies have to buy and sell in different currencies around the world, their primary goalis to avoid losses and to fix the price of the currency exchange so that they can manage their profitabilitywith surety. This chapter takes a look at some of the currency tools that companies use to manage thisrisk.Global firms like Walmart often set up local operations that help them balance or manage their risk bydoing business in local currencies. Walmart now has 304 stores in China. Each store generates sales inrenminbi, earning the company local currency that it can use to manage its local operations and topurchase local goods for sale in its other global markets. DOpening Case Exercises(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)1.List two reasons a global company needs foreign exchange.2. Why is Walmart concerned about foreign exchange rates? Opening Case: Why a Main Street Firm, Walmart, Is Impacted by ForeignExchange FluctuationsMost people in North America are familiar with the name Walmart. It conjures up an image of a gigantic,box-like store filled with a wide range of essential and nonessential products. What's less known is thatWalmart is the world's largest company, in terms of revenues, as ranked by the Fortune 500 in 2010. With$408 billion in sales, it operates in fifteen global markets and has 4,343 stores outside of the UnitedStates, which amounts to about 50 percent of its total stores. More than 700,000 people work forWalmartinternationally. With numbers like this, it's easy to see how important the global markets havebecome for this company.Walmart's strength comes from the upper hand it has in its negotiations with suppliers around the world.Suppliers are motivated to negotiate with Walmart because of the huge sales volume the stores offermanufacturers. The business rationale for many suppliers is that while they may lose a certain percentageof profitability per product, the overall sales volume of an order from Walmart can make them far moreSaylor URL: http://www.saylor.org/booksSaylor.org315money overall than orders from most other stores. Walmart's purchasing professionals are known forbeing aggressive negotiators on purchases and for extracting the best terms for the company.In order to buy goods from around the world, Walmart has to deal extensively in different currencies.Small changes in the daily foreign currency market can significantly impact the costs for Walmart and inturn both its profitability and that of its global suppliers.A company like Walmart needs foreign exchange and capital for different reasons, including the followingcommon operational uses:1.To build new stores, expand stores, or refurbish stores in a specific country2. To purchase products locally by paying in local currencies or the US dollar, whichever is cheaper andworks to Walmart's advantage3. To pay salaries and benefits for its local employees in each country as well as its expatriate and globalworkforce4. To take profits out of a country and either reinvest the money in another country or market or save itand make profits from returns on investmentTo illustrate this impact of foreign currency, let's look at the currency of China, the renminbi (RMB), andits impact on a global business like Walmart. Many global analysts argue that the Chinese governmenttries to keep the value of its currency low or cheap to help promote exports. When the local RMB is valuedcheaply or low, Chinese importers that buy foreign goods find that the prices are more expensive andhigher.

Question

1. List two reasons a global company needs foreign exchange. 2. Why is Walmart concerned about foreign exchange rates? However, Chinese exporters, those businesses that sell goods and services to foreign buyers, find thatsales increase because their prices are cheaper or lower for the foreign buyers. Economists say that theChinese government has intervened to keep the renminbi cheap in order to keep Chinese exports cheap:this has led to a huge trade surplus with the United States and most of the world. Each country tries topromote its exports to generate a trade advantage or surplus in its favor. When China has a trade surplus,means the other country or countries are running trade deficits, which has &#34;become an irritant to a lot ofChina's trading partners and those who are competing with China to sell goods around the world.&#34;Saylor URL: http://www.saylor.org/booksSaylor.org316For Walmart, an American company, a cheap renminbi means that it takes fewer US dollars to buyChinese products. Walmart can then buy cheap Chinese products, add a small profit margin, and then sellthe goods in the United States at a price lower than what its competitors can offer. If the Chinese RMBincreased in value, then Walmart would have to spend more US dollars to buy the same products, whetherthe products are clothing, electronics, or furniture. Any increase in cost for Walmart will mean an increasein cost for their customers in the United States, which could lead to a decrease in sales. So we can see whyWalmart would be opposed to an increase in the value of the RMB.To manage this currency concern, Walmart often requires that the currency exchange rate be fixed in itspurchasing contracts with Chinese suppliers. By fixing the currency exchange rate, Walmart locks in itsproduct costs and therefore its profitability. Fixing the exchange rate means setting the price that onecurrency will convert into another. This is how a company like Walmart can avoid unexpected drops orincreases in the value of the RMB and the US dollar.While global companies have to buy and sell in different currencies around the world, their primary goalis to avoid losses and to fix the price of the currency exchange so that they can manage their profitabilitywith surety. This chapter takes a look at some of the currency tools that companies use to manage thisrisk.Global firms like Walmart often set up local operations that help them balance or manage their risk bydoing business in local currencies. Walmart now has 304 stores in China. Each store generates sales inrenminbi, earning the company local currency that it can use to manage its local operations and topurchase local goods for sale in its other global markets. DOpening Case Exercises(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)1.List two reasons a global company needs foreign exchange.2. Why is Walmart concerned about foreign exchange rates? Opening Case: Why a Main Street Firm, Walmart, Is Impacted by ForeignExchange FluctuationsMost people in North America are familiar with the name Walmart. It conjures up an image of a gigantic,box-like store filled with a wide range of essential and nonessential products. What's less known is thatWalmart is the world's largest company, in terms of revenues, as ranked by the Fortune 500 in 2010. With$408 billion in sales, it operates in fifteen global markets and has 4,343 stores outside of the UnitedStates, which amounts to about 50 percent of its total stores. More than 700,000 people work forWalmartinternationally. With numbers like this, it's easy to see how important the global markets havebecome for this company.Walmart's strength comes from the upper hand it has in its negotiations with suppliers around the world.Suppliers are motivated to negotiate with Walmart because of the huge sales volume the stores offermanufacturers. The business rationale for many suppliers is that while they may lose a certain percentageof profitability per product, the overall sales volume of an order from Walmart can make them far moreSaylor URL: http://www.saylor.org/booksSaylor.org315money overall than orders from most other stores. Walmart's purchasing professionals are known forbeing aggressive negotiators on purchases and for extracting the best terms for the company.In order to buy goods from around the world, Walmart has to deal extensively in different currencies.Small changes in the daily foreign currency market can significantly impact the costs for Walmart and inturn both its profitability and that of its global suppliers.A company like Walmart needs foreign exchange and capital for different reasons, including the followingcommon operational uses:1.To build new stores, expand stores, or refurbish stores in a specific country2. To purchase products locally by paying in local currencies or the US dollar, whichever is cheaper andworks to Walmart's advantage3. To pay salaries and benefits for its local employees in each country as well as its expatriate and globalworkforce4. To take profits out of a country and either reinvest the money in another country or market or save itand make profits from returns on investmentTo illustrate this impact of foreign currency, let's look at the currency of China, the renminbi (RMB), andits impact on a global business like Walmart. Many global analysts argue that the Chinese governmenttries to keep the value of its currency low or cheap to help promote exports. When the local RMB is valuedcheaply or low, Chinese importers that buy foreign goods find that the prices are more expensive andhigher.

Accepted Answer

A foreign currency can be referred to as the currency that belongs to some foreign nation. Of all…