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Global Financing and Exchange Rate Mechanisms

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Global Financing and Exchange Rate Mechanisms
Michael C. McGee
November 6, 2012
Ian Finley

Global Financing and Exchange Rate Mechanisms
Globalization is ushering in tremendous business opportunities, competitive advantages, and greater profitability for companies that choose to set up operations in foreign countries. However, along with these opportunities come various risks to these companies. One of the main risks these companies will face is foreign currency exchange rate risk. Companies that plan to set up operations in a foreign country must exchange its domestic currency into the currency of the host nation to buy the necessary building materials, supplies, and other necessary resources that the operations will require (Hill, 2009). For example, if a U.S. company desires to set up operations in the country of China, it will have to exchange U.S. dollars currency into Chinese currency-the Yuan. If a company in Japan wants to set up operations in Spain or Italy, it would have to exchange its currency- the Yen into these countries’ currency, which is the Euro. The foreign currency exchange rates between these countries consistently fluctuate causing one to appreciate or depreciate against the other. The unpredictable movement of the foreign currency exchange rates can have adverse effects on a company’s investments, and profits that have operations in a foreign country. Foreign companies with operations in the U.S. normally convert the dollars it earns back into its domestic currency (Hill, 2009). The main foreign currency exchange risk these foreign companies may face is the depreciation of its domestic currency against the currency of the U.S.-the dollar. This transaction can cause potential detrimental actions to its revenues and profits. Mitigating these risks and challenges have become a major priority for these companies. Most companies...

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