Premium Essay

Exchange Rate Fluctuation and Home Made Goods

In: Business and Management

Submitted By WISEONE
Words 5088
Pages 21

The term “Exchange rate” is referred to as the value of the money of one country compared to the money of another country exchange rate movement is therefore the fluctuation in the value of a country’s currency when compared to another country at particular time period. The importance of foreign exchange rate on inflow of foreign private investment has been traced by Obadan (1994) who noted that its importance as the center pieces of the investment environment derives from the argument that a sustained exchange rate misalignment in terms of over-valuation or under-valuation is a major source of macro economics disequilibrium which spells danger for investment. A stable exchange rate encourages, foreign and local investor into such an economy. This is because, an over-valued exchange rate discourage export and negatively affect the foreign private investment Salako (2004). Further state that there is a long run equilibrium relationship between investment inflow to Nigeria and variables such as nominal effective exchange rate. A high foreign exchange rate increase the prices of goods and services and discourage exportation while at the sometime encourages importation of goods which are cheaper. This has negative effect on the investment and with such factors investors withdraw their money from such an economy (Solomon, 2012). It is therefore imperative to state that foreign exchange rate is a significant factor that determines investment in any economy with Nigeria inclusive. In recent years, exchange rate has fluctuated considerably. The official and parallel exchange rate depreciated annually at an average of 34% and 18%, respectively, between 1986 and 2006 (CBN, 2007). The effects of such fluctuations are evident. Inflation experience during the same period has gone through episodes of creeping to moderate and from...

Similar Documents

Premium Essay


...Investing in foreign securities, while a good thing for your long-term portfolio, continues to pose new threats for investors. As more people broaden their investment universe by expanding into foreign stocks and bonds, they must also bear the risk associated with fluctuations in exchange rates. Fluctuations in these currency values, whether the home currency or the foreign currency, can either enhance or reduce the returns associated with foreign investments. Currency plays a significant role in investing; read on to uncover potential strategies that might downplay its effects. Pros of Foreign Diversification There is simply no doubting the benefits of owning foreign securities in your portfolio. After all, modern portfolio theory (MPT) has established that the world's markets do not move in lockstep and that by mixing asset classes with low correlation to one another in the appropriate proportions, risk can be reduced at the portfolio level, despite the presence of volatile underlying securities. As a refresher, correlation coefficients range between -1 and +1. Anything less than perfect positive correlation (+1) is considered a good diversifier. The correlation matrix depicted below demonstrates the low correlation of foreign securities against domestic positions. Monthly Correlations 1988 to 2006 Security Type S&P 500 Index Russell 2000 Index Russell 2000 Value MSCI EAFE International Small Cap International Small Cap Value MSCI Emerging Markets S&P 500...

Words: 1344 - Pages: 6

Premium Essay

Foreign Currency Translation

...functional currency of the subsidiary is also its home currency. 4 a) If the functional currency is the home currency, 4 b) If the functional currency of the subsidiary is not its home currency, 5 III. Reasons for Translation 5 A. Recording direct business transactions 5 B. Reporting operations conducted through a foreign enterprise 6 C. Measuring the enterprise exposure to the effects of currency fluctuation 7 D. Communicating with foreign audiences-of-interest 7 IV. Financial statement effects of alternative translation rates 7 A. Exchange rates used in translation 7 1. Current rate: 7 2. Historical rate: 7 3. Average rate: 8 B. Risks associated with fluctuations of exchange rates 8 1. Currency transaction risk 9 2. Currency translation risk 9 V. Foreign Currency Translation Methods 9 A. Single rate method 10 1. Current rate method 10 B. Multiple rate method 11 1. Current/noncurrent method 11 2. Monetary/nonmonetary method 11 3. Temporal method 12 VI. Foreign Currency Transactions 13 A. Exchange rate mechanisms 13 1. Independent float: 13 2. Pegged to another currency: 13 3. European monetary system: 13 B. Foreign currency markets 13 1. Exchange Rate 13 2. Types of Exchange rates 14 a) Spot rate: 14 b) Forward rate: 15 c) Swap transaction: 15 C. Hedging foreign exchange risk 16 1. Definition 16 2. Techniques for hedging foreign exchange......

Words: 4613 - Pages: 19

Premium Essay

Financial Risk Management

...Foreign Exchange Risk Management Michael Highfill Liberty University BUSI 620 – B05 LUO Dr. Mike Thirtle July 6, 2012 Foreign Exchange Risk Management Introduction Foreign exchange (FX) is a risk factor that must be considered by all firms that wish to enter, grow, and succeed in the global marketplace. Although most U.S. exporters prefer to sell their goods in U.S. dollars, creditworthy foreign buyers are increasingly demanding to pay in their local currencies (“Foreign Exchange Risk Management”, n.d.). Therefore, this currency exchange adds risk to any global trade that must be accounted for and managed, for a firm to remain competitive in the global marketplace. Definitions Foreign Exchange Risk Before we begin our discussion, we must define a working definition of foreign exchange risk. Global commerce is facilitated through foreign exchange markets. These markets affect global commerce in two ways. First, importers exchange their domestic currency for foreign currency, in order to purchase international goods. Second, multinational companies exchange profits earned in foreign currencies for domestic currency to use in their home nation. The foreign currency exchange market is made up of corporations, governments, and private individuals who trade international currencies among themselves (Bofah, n.d.a). The exchange rates for currency pairs such as the United States (U.S.) dollar and the Euro......

Words: 2596 - Pages: 11

Free Essay

Theory of Mnc

...increases agency costs but may result in better decisions c) Internet may facilitate monitoring of foreign subsidiaries 3) Corporate control used to reduce agency problems a) executive compensation with stock b) threat of hostile takeover c) monitoring by large shareholders Constraints encountered in meeting goals 1) Environmental - other countries may be tougher (e.g., pollution controls) 2) Regulatory - e.g., currency convertibility, remittance of profits, etc. 3) Ethical - e.g., bribes may be more acceptable in other countries Theories of International Business Theory of Comparative Advantage countries specialize in the production of goods they can produce with relative efficiency and trade for other products Imperfect Markets Theory factors of production (labor and other resources)...

Words: 3374 - Pages: 14

Premium Essay


...Financial Analysis: Billabong International Limited - Australia A paper submitted to Webber International University In partial fulfillment for the Master’s in Business Administration International Business By: Patrick L. Date: July 11, 2012 Course: MBA 6811 Semester: 2012 Instructor: Eberle Table of Contents Introduction 3 Country Factors & Monitoring Central Bank Intervention 4 Foreign Exchange Market & Movements in Currency 5 Currency Futures & Options 7 Arbitrage Opportunities & IFE 8 Monitoring Exchange Rate Trends & Risk 9 Direct Foreign Investment 11 Capital Budgeting 12 Corporate Governance & Country Risk Analysis 14 Capital Structure 15 Long-Term International Financing 17 Financing International Trade 19 Short-Term International Financing & Managing Cash Internationally 20 Current Events 21 Conclusion & SWOT Analysis 22 References 24 Introduction Billabong International Limited (BBL) is an Australia based listed company headquartered at Burleigh Heads in Queensland, Australia. The main business activities of the company are related to marketing, distribution, wholesale and retail of wetsuits, clothing, eye wears, hardboards for board games and accessories concerned with the season of snow fall, surfing and skating. Billabong’s products are being sold......

Words: 5108 - Pages: 21

Premium Essay


...BOFIT Discussion Papers 19 • 2011 Zhichao Zhang, Nan Shi and Xiaoli Zhang China’s new exchange rate regime, optimal basket currency and currency diversification Bank of Finland, BOFIT Institute for Economies in Transition BOFIT Discussion Papers Editor-in-Chief Laura Solanko BOFIT Discussion Papers 19/2011 23.7.2011 Zhichao Zhang, Nan Shi and Xiaoli Zhang: China’s new exchange rate regime, optimal basket currency and currency diversification ISBN 978-952- 462-714-6 ISSN 1456-5889 (online) This paper can be downloaded without charge from Suomen Pankki Helsinki 2011 BOFIT- Institute for Economies in Transition Bank of Finland BOFIT Discussion Papers 19/2011 Contents Abstract ................................................................................................................................................ 3 Tiivistelmä ........................................................................................................................................... 4 1 2 Introduction ................................................................................................................................ 5 Theoretical model ..................................................................................................................... 11 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3 Policy goal .................................................................................................................... 12......

Words: 11867 - Pages: 48

Premium Essay


...owns 100% of the Real Furniture Company (RFC). RFC imports a range of hardwood and cane furniture, which is manufactured in overseas locations. The hardwood for RFC is imported from South America and Asia and is imported to other countries in finished form. Both ghc and rfc are handled separately. From the above introduction its quiet clear that ghc and rfc are two separate companies and I am going to now look into the financial practices and some other pros and cons of both companies. Further moving on to the discussions of GHC with the overseas Government, understanding the benefit expected by the overseas government from GHC and the benefits GHC request from the government, then looking into the risks associated with the investments made in the different countries of the world and at last moving on to the responsibilities that are assigned to the group treasurer and the...

Words: 2437 - Pages: 10

Premium Essay

Deprication of Indian Rupee

...The Indian Rupee Crisis Economics Essay-1 In this paper we are going to examine the cause and the impact of rupee depreciation on the Indian economy. Since last few months Indian rupee came under great stress as overseas investors are paring their exposure to Asia’s third-largest economy amid international uncertainty and mounting worries over the domestic economy. In 2009 – 2010 the exchange rate was hovering around the 43 – 45 rupees per US Dollar level. And now it is around 55 – 56 levels, the main reasons to examine are increase in import bill, higher inflation, fiscal mismanagement and all resulting in higher cost of borrowing. The rupee has lost more than 15% of its value this year, making it one of the worst performing currencies in Asia. This paper reviews the probable reasons for this depreciation of the rupee and the outlook for the same. It also reflects on the policy options to help prevent the depreciation of the Rupee. This paper will firstly discuss about the economy of currency to give an overview of the problem and the factors related to it. Afterwards it will be examining the causes of the Indian rupee depreciation with respect to the Indian economy and the global economy. And after that it will analyse the impact of the same on trade and business. Finally, recommending the policy actions in response of the falling currency. II. LITERATURE REVIEW: These papers include the work which have been used as a basis or reference for formulating the policies......

Words: 3340 - Pages: 14

Premium Essay

The Foreign Exchange Market & Exchange Rate

...they buy and or sell goods. The foreign exchange market is a place where the transactions in foreign exchange are conducted. In practical world the external transaction requires the use of foreign purchasing power i.e. foreign currency. The foreign exchange market facilitates such transactions by performing number of functions. Definitions of Foreign Exchange Market According to Paul Einzig, "The foreign exchange market is the system in which the conversion of one national currency in to another takes place with transferring money from one country to another." According to Kindleberger, "It is place where foreign moneys are bought and sold." In simple words, the foreign exchange market is a market in which national currencies are bought and sold against one another. There are large numbers of foreign transactions such as buying goods abroad, visiting foreign country for any purpose. Corresponding nation in whose currency the transaction is to be fulfilled. The foreign exchange market provides the foreign currency against any national currency. However, it is to be understood that unlike other markets, this market is not restricted to any particular country or any geographic area. There are large numbers of dealers' instruments such as exchange bills, bank drafts, telegraphic transfers (TT), etc. There are certain other dealers such as brokers, acceptance houses as well as the central bank and treasury of the nation. Functions of Foreign Exchange Market a) Transfer...

Words: 4258 - Pages: 18

Premium Essay


...International Finance Report PORSCHE RISK MANAGEMENT TOC \t "Subtitle, 1,Title, 2"\b _TOCRange Company Overview: PAGEREF _Toc \h 3 I. Foreign Exchange Exposure: PAGEREF _Toc1 \h 3 1.1 Operating Exposure PAGEREF _Toc2 \h 4 1.2 Transaction Exposure PAGEREF _Toc3 \h 5 1.3 Commodity Exposure PAGEREF _Toc4 \h 5 II. Porsche’s hedging strategies PAGEREF _Toc5 \h 8 2.1 Aggressive ‘Put options’ Hedging strategy PAGEREF _Toc6 \h 8 2.2 Diversifying Financing PAGEREF _Toc7 \h 9 2.3 Operational Hedging PAGEREF _Toc8 \h 9 References PAGEREF _Toc9 \h 11 Company Overview: Porsche is hit head-on by a crisis without precedent at the end of the 1980s, up to threaten the independence of the brand, supreme mantra established by its founders. The stock market crash of 1987, the ruin of many wealthy Americans and new competition from Japanese cars are collapsing sales of German in the United States. In the early 1990s, the bankruptcy threat, while sales dropped tremendously, from 14.000 in 1986 to 5320 units in 1992. A recovery is considered by Mercedes-Benz or Volkswagen. But in 1993, the management of the company is entrusted to Wendelin Wiedeking, working until then as a production manager. He applies at his arrival drastic changes inspired by Toyota: hierarchical reorganization, suppression of nearly 2,000 jobs, rationalization of production, number of subcontractors divided by three. These choices are obviously intended to reduce costs. Similarly, he......

Words: 3119 - Pages: 13

Premium Essay

Baker Adhesives

...product line. The toys needed to be waterproof and the adhesives require very specific needs. Also, the payment from the first order had just been received and Baker was looking to pay down some of the balance of their line of credit, which currently stood at $180,000. However, Moreno told Baker that their sale of adhesives to NOVO was not going to be as profitable as they originally anticipated. The first order from Novo was denominated by Brazilian real (BRL) which would be converted into US dollars (US$). Since the time that Baker and Novo agreed to terms on the sale, the value of the deal had dropped significantly because of the exchange rates. Furthermore, because Baker and Novo had agreed on a per-gallon price, the exchange rate changes severely hurt the profit margin Baker Adhesives expected on receiving from the first deal. What made it more difficult was that Novo was unwilling to change the per gallon price for this new order. This would mean that the new order would not be as profitable as...

Words: 2421 - Pages: 10

Premium Essay

Gop Samples

... B) National income. C) Exchange rates. D) Tariffs. E) A tax on income earned on foreign stocks. 2. ______________ is (are) income received by investors on investments in foreign financial assets (securities). A) Portfolio income B) Foreign direct investment income C) Unilateral transfers D) Factor income E) All of the above 3. Also known as the “Central Banks’ Central Bank,” the ___________ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis. A) World Bank B) International Financial Corporation (IFC) C) World Trade Organization D) International Development Association (IDA) E) Bank of International Settlements (BIS) 4. ___________ is not a factor that causes currency supply and demand schedules to change. A) Relative inflation rates B) Change in exchange rates. C) Relative interest rates D) Relative income levels E) Expectations 5. A large increase in the income level in Mexico along with no growth in the U.S. income level, ceteris paribus, is expected to cause a/an _________ in Mexican demand for U.S. goods, and the Mexican peso should ____________ A) Increase; appreciate B) Increase; depreciate C) Decrease; depreciate D) Decrease; appreciate 6. An increase in U.S. interest (real) rates relative to German interest rates would likely ___________ the......

Words: 2845 - Pages: 12

Premium Essay

Influence on Exchange Rate

...1.1 Introduction: Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another currency or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country it also called rate of exchange or foreign exchange rate or currency exchange rate. 1.2 Objective of the Report: The primary objective of this report is to know the over functions of government in foreign exchange market. But the objective behind this study is something broader. Objectives of the study are summarized in the following manner: • To describe the exchange rate systems used by various government. • To explain how government can use direct and indirect intervention influence exchange rates. • To study existing government control over exchange rate system. • To know how government can affect economic conditions. • To have some theoretical exposures that will be helpful for our future career. 1.3 Methodology: For preparing this report, we have undergone group discussion, collected data from internet. We also studied different circulars and reference books on this topic. We hope these criteria will be enough to find out different picture of government influence on exchange rate system. 1.4 Limitations of the Study: 1. The time, 1(One)......

Words: 1724 - Pages: 7

Premium Essay

Global Business

...the pons & cons , Cost/ benefitr fro the cost country n home country? Answer: Foreign Direct Investment: FDI occurs when a frim invest directly in facilities to produce or market product in a foreign country. The Theories of FDI: Theroies of FDI may be classified under the following------ 1. Production or product Cycle Theory of Vernon 2. The theory of Exchange Rate on Imperfect Capital Market 3. The Internalisation Theory 4. The Eclectic Paradigm of Dunning Production or product Cycle Theory of Vernon Production or product theory developed by Vernob in 1966 was used to explain certain types of FDI. He believes that there are four stage of production cycle— * Innivation * Growth * Maturity * Decline. Vernon’s production life-cycle suggest that frims undertake FDI at particular stage in the life cycle of products they have developed or produced. However, Vernon’s theory does not adresss the issue of whether FDI is more efficient than exporting or licensing for expanding abroad. The theory of Exchange Rate on Imperfect Capital Market: This is another theory which tried to explain FDI. Initially the foreign exchange risk has been analyzed from the perspective of international trade. However, currency risk rate theory cannot explain simultaneous foreign direct investment between countries with different currencies. The sustainers argue that such investments are made in different times, but there are enough cases that......

Words: 4652 - Pages: 19

Premium Essay

Managing Currencies and Policy Coordination

...[1] Managed currency The majority of major world currencies are managed at least to some degree. This is due to the purchase and sale of these currencies by the central banks of different countries. They do this in order to stabilize the international money markets and affects their own monetary policies. Why managing currencies? a. Reduce currency fluctuations If the value of currencies fluctuate significantly this can cause problems for firms engaged in trade. * For example if a firm is exporting to the US, a rapid appreciation in sterling would make its exports uncompetitive and therefore may go out of business. * If a firm relied on imported raw materials a devaluation would increase the costs of imports and would reduce profitability. b. Stability encourages investment. The uncertainty of exchange rate fluctuations can reduce the incentive for firms to invest in export capacity. Some Japanese firms have said that the UK’s reluctance to join the Euro and provide a stable exchange rates make the UK a less desirable place to invest. c. Keep inflation Low Governments who allow their exchange rate to devalue may cause inflationary pressures to occur. This is because AD increases, import prices increase and firms have less incentive to cut costs. [2] From the...

Words: 2706 - Pages: 11