Perceptions Toward International Financial -Myassignmenthelp.Com

Question: Discuss About The Perceptions Toward International Financial? Answer: Introduction The Multinational companies with operations spreading in different countries around the globe have to deal with regular changes in exchange rates. In-fact the management of these companies have to give fair amount of their time on dealing with exchange rates differences to ensure that the changes in exchange rates do not affect their financial position and operational performances negatively (Madura 2015). There are numerous ways and techniques to deal with exchange rate differences. In order to reduce the risks of exchange rate exposure organizations that are operating in foreign countries will use different techniques and methods to reduce the overall risks of foreign exchange rates differentiation at manageable level. A brief discussion shall be made in a document on different ways and methods that can be used by organizations to the risk of losing money due to sudden dramatic changes in foreign exchange rates (Brigham and Ehrhardt 2013). Summary of Explanation The American dollar can very much be termed as the recognized currency for international trade due to its huge impact on international transactions. Changes in exchange rates as already mentioned is a matter of regular occurrence thus, it is no surprise that investors as well as business organizations with numerous international transactions are constantly looking to use different methods and techniques to reduce the risks associated with foreign exchange fluctuation (Petty et al. 2015). Fluctuation in exchange rates need not always be negative towards an investor or a business organization however, no business organization would be like to involve in a situation that increases the uncertainty level. Investors that have invested fair share of their total investments in foreign currencies will also be looking to reduce the overall risks associated with dramatic changes in these exchange rates by taking necessary steps (Cavusgil et al. 2014). International financial management has always been a subject of curious discussion since the effect of globalization sat in the world business. The given article in this case has discussed the international perspective and its impact of foreign exchange rate. Globalization and the ever increasing multi-national companies have certainly contributed to the ever increasing importance and curiosity in foreign exchange rates fluctuations. The author while explain the reasons of changes in foreign exchange rates have discussed various elements in foreign exchange markets that influences the foreign exchange rates. The importance of common judgment along with rules have been talked about extensively in the article. Most of the analysis of the author is spot on however, let us concentrate on the methods and ways that the investors can use to reduce the risks associated with foreign exchange fluctuations. There are number of ways to manage the risks associated with foreign exchange fluctuations. It would be wrong to thing that any single investor or business organization can manage the exchange rates as there are numerous elements that contribute to the exchange rate fluctuation almost all of which are beyond the control of an investor and a business organization. Thus, rather than trying to manage the exchange rates the better option for an investor as well as business organization is to use different available techniques and methods to reduce the possibility of huge loss from dramatic changes in exchange rates (Deresky, 2017). Achieving stability in US dollar is the responsibility of US economy and dependent on the monetary policy of the country along with numerous other national and international issues that have substantial influence on the stability of dollar. From the rate of interests for borrowing in the country to the international crude and oil prices; from issues that are a ffecting the national environment to the international financial turbulence. From the global economic meltdown to the global economic resurgence since the US dollar is so much in use across the globe most of the issues in financial world as well as non-financial world tend to affect the stability of US dollar against other currencies around the globe (Jung et al. 2016). However, due to the internal strength of US economy and the strong foundation laid down by the past generations US economy has sustain numerous issues with relative ease and have emerged victorious time after time. Similarly due to the core strength of US currency, i.e. US dollar, against all other currencies across the globe no huge slump has been recorded in recent past. Thus, it can be said with certain amount of confidence that the stability of US dollar is very much the responsibility of the policy makers of US however, a business organization and investors can certainly reduce the overall risks associated with their investment and foreign exchange earnings and outgoes by taking certain steps in right direction. Let us now have a brief discussion on the number of options that an investor or a business organization has in front of it to avoid any loss due to fluctuations in the foreign exchange rates. The Investors and business organizations should look for countries with strong currencies to invest its funds and do business. The countries with strong currency will help the investors to reduce its overall risks associated with foreign currency as compare to other currencies the strong currency will hold its ground will remain stable through-out the investment period (Brooke 2016). In times of turbulence, as far as turbulence in foreign exchange is considered the most fragile area that is hit badly is the foreign bond market. Thus, investors as well as business organizations should avoid making investments in foreign bonds at times of turbulence in the foreign exchange market (Finkler et al. 2016). Making investments in currency-hedged bonds would improve the financial stability of an investor as well as an organization that has invested in such types of bonds. Investment in mutual funds is quite a safe option to choose to avoid getting exposed to foreign exchange rates fluctuations. With sophisticated investments such as futures and options it is possible to reduce the overall risks associated with investments in foreign bonds to a huge extent. Diversification is one of the most important and essential aspects of managing the risks in investment profile. Investors should ensure that the investment profiles are as diverse as possible from the global perspective. Diversification will help in spreading the risks to different securities and bonds to reduce the possibility of being exposed due to sudden changes in a particular currency rate as the other currency rates will hold its ground in all probability (Cangiano et al. 2013). Using hedging instrument will help the investors as well as business organizations to hedge its foreign currency earnings and outgoes as well as other foreign currency assets and liabilities. Thus, the exchange rate fluctuations will not have any impact on such earnings and outgoes as well as assets and liabilities. Using Swap options, future options, cap floor options, put and call options can help the business organizations to reduce the risks associated with foreign exchanges fluctuations. However, these are to be used properly to ensure that the premiums to be paid is worth with business objective that an organization has. Evaluation of various ways to protect from currency variation Multi-national company is a company that has business operations spread in different parts of the world. Obviously, due to the expansion of business such companies have to deal with foreign currencies on a regular basis. Business operations include expenditures on purchases, payment for salaries and wages, other expenses essential to the business operations, sales etc. In case of multi-national companies with business operations in different parts of the world such operations require dealings in foreign currencies. Considering the importance of foreign transactions and their influence in the overall business, operations such multi-national companies will have to take into consideration the numerous risks that are associated with the business operations using foreign currencies (Bodie et al. 2014). It is not possible to completely wipe off the whole risks associated with foreign operations of a multi-national company however, with the effective use of different techniques and methods such companies can certainly reduce the overall risks associated with business operations in foreign currencies. Effective utilization of these techniques and methods depend on the ability of the management to use these based on the situation of foreign exchange market along with economic and financial realities at micro and macro levels. Compare to an investor a multi-national company certainly have to manage the risks in foreign exchange fluctuations at a much bigger level, as the stakes are much higher for such companies (Wild et al. 2014). Foreign exchange risk management: The conversion of currencies will logically bring the exchange risk into consideration as it is a natural progression with foreign exchange transactions. Switching over from one currency to other will compulsorily require the adjustment of currencies according to the exchange rates on the date of conversion. In order to reduce this risk a multinational company can use different methods depending on the situation and requirements of such organization. From the perspective of a multi-national company the extent of vulnerability that will affect the profit and losses of such organization due to the fluctuations in foreign exchange rates can be termed as currency exposure. Not only the items of profits and losses are influenced with the currency exposure but even the balance sheet items are also impacted due to currency exposure thus, management in such companies will have to be pro-active and should use necessary measures to reduce such risks to an acceptable level (Lastra et al. 2015). In such companies foreign exchange risk management assumes great significance in overall policy making decision in such companies. The exposures to foreign currency transactions and subsequent profits and losses in a multi-national companies along with monetary and non-monetary items can mainly be divided into following broad categories; Transaction exposure. Translation exposure. Economic exposure. Understanding the above exposures in brief detail is important to the management of foreign exchange currency risks associated with the fluctuations in foreign exchange rates. Transaction exposure: Multi-national companies are engaged in different types of transactions that include commitment of payment of foreign currency at a future date to a supplier or other such party as part of business operations. Any exchange rate fluctuation between the period of actual transaction and the date of payment in relation to the home currency of the organization with that foreign currency will influence the final liability of such companies. Especially importers are mainly impacted due to transaction exposure which could be reduced by incorporating necessary exchange management measures (Allen et al. 2013). Translation exposure: Multi-national companies with global operations will incur liabilities as well as accrue assets. Liabilities could be payable as well as others and assets could be receivables along with others. Any exchange rate fluctuations in currencies in which the receipts and payments have to be made in the future in respect of the above that have been accumulated due to global operations would certainly have huge impact on the performance and financial position of such companies. The net asset value of such companies between two alternative dates will be deeply impacted in case of any large variation in exchange rates. The capital gearing ratio of such companies will also be influenced substantially in case such large variation in foreign exchange rates (Jung 2017). Economic exposure: The economic strengths and realities in different countries are not similar in different countries thus, in cross border trading countries with relatively weaker economies compare to the competitors in cross border trading will be exposed to economic exposure. Strengths of currencies, relative costs, prices in these countries will contribute to the economic exposure (Persakis and Iatridis 2016). Covering the foreign exchange risks of different types as mentioned in the above requires huge amount of planning and necessary importance have to be given to the management of exchange risks in the overall strategy of running an organization. Hedging is the technical term that is used to cover the foreign exchange risks in an organization (Stent 2017). In case an organization decides not to hedge then it can be assumed that the management of such organization believes that the future movements in exchange rates will be in the favor of such organization. It is important to note here that even if an organization decides to hedge everything it is still not possible to eliminate the economic exposure completely due to certain elements that are beyond the control of an organization. Opportunity cost is another aspect that an organization will have to consider while taking decisions relating to hedging of financial instruments of such organization (Dimmock 2013). Multi-national companies operating in several countries have certain advantage over other organization as the managers of such organizations can use their own management techniques to manage the foreign exchange risks accordingly. Such techniques include opening foreign currency accounts in countries where the company will be receiving foreign exchanges attributable to business operations; netting exposure by switching the currencies of different countries in respect of payables and receivable from business operations. Switching the base of manufacturing units to different countries to incur expenditures on home currency will help an organization to reduce the foreign exchange fluctuations risks significantly (Panic 2015 ). Forward exchange contracts: Usually extended to customers, in this kind of hedging banks offer forward exchange contracts for both sales as well as purchases with a particular maturity date with a pre-determined amount to be paid or received as the case may be (Phan et al. 2014). This helps an organization to hedge its payable and receivable and subsequently in case of variation in exchange rates customers can use this contract to reduce the possible expenditures or increase the possible revenue accordingly. Customers are given the option to choose the tenor as well as the currency of hedge. Forward exchange contracts give the customer an option to use it on any day during the period of such contracts thus, making it quite flexible from the point of view of the customers. However, since the rate in such contract is fixed thus, even if the fluctuation is in favor of the customers still the rate does not change (Dudin et al. 2015). Currency Futures: An agreement to purchase or sell a specific financial instrument at a pre-determined price at a future rate is a future contract. An organization can take up an opposite currency future contract to its foreign currency balance to deal with foreign currency exposure. The review of future contracts are made on a regular basis thus, the value of the future contracts keep on changing depending on the agreed prices of such futures. The limitations of futures are mainly the maturity rate and the contract size as often the corporate requirements might not be tailored according to the maturity rate and contract size thus, the organizations have to tailor its requirements accordingly which is not a suitable condition for any organization (Kaya and Koch 2015). Currency option: An option that gives right to the buyer of the option without any obligation to purchase, known as call option, or to sell, known as put option, at a pre-determined prices as agreed in the relevant options, call or put option as the case may be, certain specific amount of foreign currency. The pre-determined price is called strike price. Thus, the most important think to note here that the buyer of the option, whether call option or put option, does not cast any obligation on the buyer rather gives him / her an option to buy or sell specific foreign currency at a pre-determined price known as strike price (Cheng et al. 2014). The buyer of the option will have to pay a premium to buy such option. An option can be exercised at any time on or before the period as mentioned in the option however, in many countries nature of these options are different. Thus, in case of American options where the buyer can exercised his right at any time on or before the period mentioned in the option but the same is not true in countries like India, Russia where the option can be exercised only on a particular date as mentioned in these options. Swap: A derivative contract that allows two parties to exchange financial instruments at agreed terms and conditions is known as Swap. Interest rate swap is the most common swap used in business transactions to reduce the risks of interest rate fluctuations (Biddle et al. 2015). Generally no trades in swaps are conducted in exchanges rather swaps are contracts between financial institutions and business organizations transacted over the counter. The parties in an interest rate swap exchange cash flows based on a notional principal amount that never changes hands in reality but used to speculate in order to hedge. The above can be better understood with a practical example. For example, suppose XYZ Limited has issued $1 Million in 5-year bonds with London Interbank Offered Rate (LIBOR) plus 130 basis points. Suppose LIBOR is currently at its historical low thus, obviously the management of XYZ limited is anxious, as the interest rate in all probability would increase in coming days. To hedge the interest rate in such cases the interest rate Swap can be used effectively. Thus, the management of XYZ Limited will have to find a company that is interested to pay an annual rate of interest that is similar to the rate quoted by the XYZ Limited in its 5 years bonds for 5 years period on equal amount. Thus, the interest rate swap will in other words will enable the XYZ Limited to find another company to funds its interest commitment for the next 5 years period. XYZ Limited will be benefitted in case the rates increases in the future over the next 5 years period and in case of the other company it will be benefitted irrespective of the fluctuation in interest rates (Altman et al. 2017). Suppose now if LIBOR rises by 0.75% then, XYZs total interest payment over the next five years period will be $225000. 225000=1000000*(5*0.013+0.017+0.0245+0.032+0.0395+0.047) This is $75000 in excess of $150000 in case LIBOR wouldnt have changed and remained flat without any variation. 150000=1000000*5*(0.013+0.017) XYZ Limited is going to pay $300000.00 which can be seen in the following calculation: 300000=1000000*5*0.06 XYZ Limited is also going to receive $225000.00 due to the interest rate swap thus, the net loss of the company will be $75000.00. Conclusion: Managing the foreign exchange rates fluctuations is an integral part of the overall management of a multi-national organization and its financial aspect. 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