Status Quo and Goals As an International trade corporation, we buy goods in foreign countries and sell it to other countries for a price difference and so to gain profit. The cost of purchasing goods in foreign countries are the majority part of our cost. The cost of purchasing goods in a foreign would fluctuate as the exchange rate of that country fluctuate. Most of times, one country’s exchange rate can be very volatile in the short term. Sometimes it is beneficial to our profit but sometimes it can cause increasing in our cost. When the exchange rate went to the direction that we don 't want it to be, the price difference advantages we have gained from purchasing goods in foreign countries would be eroded and it would eventually hurt our profit from selling goods in our country or other countries. So, in order to prevent the price difference we gained getting eroded from short term or even long term exchange rate volatility, we will need a stable currency market on our back so that our revenue won’t fluctuates significantly every year. However, the currency market is the most volatile market on earth, it will never be stable. And it has come to my attention that due to the huge fluctuation of some currencies’ value, our cost of purchasing goods in some countries has been increased significantly. Moreover, I realized as a new formed company, we don’t have a very matured hedging strategy to offset our currency exposure, also cost of strategy we currently implemented in
2) Minimize the cost associated with the foreign exchange risk management strategy, i.e. the management and hedging costs
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.
Exchange rates fluctuate in response to a multitude of factors. Upswings and downswings in the exchange rate can have both positive and negative consequential effects. Depreciation drops the value of the dollar and permits owners of foreign currencies to purchase a greater amount of Australian goods. Hence, depreciation makes Australian exports cheaper and accordingly
An increase in the exchange rate of the U.S. dollar relative to a trading partner can result from
Changes in exchange rates are the result of changes in demand and supply factors for goods and services, such as changes in tastes, relative incomes, and relative prices. Under a flexible-rate policy, all domestic prices are linked with foreign prices. Any change in the exchange rate automatically alters the prices of all foreign goods to domestic goods. The price change alters the relative attractiveness of imports and exports and maintains equilibrium in each trading partner's balance of
The international environment in which the business is operating is very important. The import-export balances, exchange rates, and foreign competition all alter and affect trade. The import-export balance is the acceptable balance of imports and exports in a country. It is measured by the balance of trade and balance of payments. The balance of trade is the difference between a country’s imports and exports, which can result in a trade deficit or trade surplus. The balance of payments is the flow of money in and out of the country. The exchange rate is the rate at which a nations currency can be exchanged for another nations currency. When the exchange rate fluctuates, it can have a large impact on a country’s balance of trade. If the exchange rate moves in a way that domestic currency strengthens, exports will end up costing more when in foreign currency. This will lead to foreigners finding other options and exports will decline. At the
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
One way to avoid over-hedging is to hedge only the minimum known payment involved in the future transaction. By hedging a portion of the transactions, a company can reduce the sensitivity of its cash flows to exchange rate movements without creating serious mismatches between the hedge and the risk. In this way, ERM — which consists of managers taking a holistic view of their company’s various risks, prioritizing the material ones, and devising ways to curb them — can help CFOs identify the most volatile foreign exchange rates and reduce some of the guesswork involved in deciding how much of their foreign exchange risk to hedge.
Consequences regarding the international businesses and the flow of trade and investment among the three countries are given below as benefits and drawbacks of holding fixed exchange rate system-
Then, we took into consideration only a fluctuation of the exchange rate. The scenarios that we analyzed covers different positions of the dollar against the euro: weak dollar (USD 1,48/EUR), stable dollar (USD 1,22/EUR) and strong dollar (USD 1,01/EUR). Different coverage of costs with hedging was also introduced in the analysis. The three main policies are of not hedging, 100% hedging with forward contracts and 100% hedging with options.
By minimizing the exchange rate uncertainty, foreign business of the home country is enhanced and can attract more funds as investments. Smoothening currency movements tends to reduce fears in the financial markets and speculative activity that might lead to heavy decline in value of the currency.
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.
The World Trade Organization is an intergovernmental organization that is mandated with the responsibility of regulating international trade. Each country in the world is considered to be endowed with limited resources that make it impossible for these countries to produce each and every good and service that they deem essential for their citizens’ consumption. It is on the basis of different and limited resource endowment that countries embark on the process of trading amongst themselves so as to export what they have in abundance to other countries and to import what their lack. The formation of the World Trade Organization was officially done on 1st January, 1995, and was done under the Marrakesh Agreement (Abreu, 1998). The organization, nevertheless, came into existence after about 124 member countries came together and agreed to form the organization. It is worth noting that the WTO was formed so as to replace the General Agreement on Tariffs and Trade (GATT), which commenced its operation in 1948.
The World Trade Organisation (WTO) is today seen as one of the pillars of international trade and financial systems of the world alongside the World Bank and the International Monetary Fund, despite being only sixteen years old. With what began as the succession to the previous guidelines and rules set out by the General Agreement on Tariffs and Trade back in 1948, it is now seen as the ‘main unifying force of world trade today’ a key player in both the conduct of trade relations and global governance. (Herman, 1999) Today, as the world’s economy and its nations continue to change and grow together with the global business environment itself, the WTO has faced new challenges and perhaps its biggest challenges to date which question the
Great Eastern Toys is a company in Hong Kong that exports a huge percent of its total sales to the North American and European markets and hence is exposed to currency risk. Previously, the company was occupied with expanding their business and the company 's management had never given much attention to currency risk until their recent meeting with their banker. The banker pointed out that the depreciation of the European currencies during the previous two years had resulted in a substantial loss of income. The company 's management was indeed convinced that they should begin to devote more time and manage their currency position. In this report, we are going to explore the different options for Great Eastern Toys to hedge