Global Finance Signature Assignment: Economic Forces and Mechanisms

Global Finance Signature
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Table of Content
TOC \o "1-3" \h \z \u Global Finance Signature PAGEREF _Toc11920564 \h 4Introduction PAGEREF _Toc11920565 \h 4I.Global Finance PAGEREF _Toc11920566 \h 4Inflation Rates PAGEREF _Toc11920567 \h 4Interest Rates PAGEREF _Toc11920568 \h 4Country’s Current Account/Balance of Payments PAGEREF _Toc11920569 \h 5Government Debt PAGEREF _Toc11920570 \h 5Terms of Trade PAGEREF _Toc11920571 \h 5Hedging Foreign Exchange PAGEREF _Toc11920572 \h 6Sample financial derivative; PAGEREF _Toc11920573 \h 6II.The balance of Payments PAGEREF _Toc11920574 \h 8III.Foreign Direct Investment, Cross-Border Acquisitions and Finance Foreign Trade PAGEREF _Toc11920575 \h 9Foreign Direct Investment PAGEREF _Toc11920576 \h 9Easy access to foreign markets PAGEREF _Toc11920577 \h 9Access to raw materials PAGEREF _Toc11920578 \h 10Hindrance to domestic investment PAGEREF _Toc11920579 \h 10Negative influence on exchange rates PAGEREF _Toc11920580 \h 10Cross-Border Acquisitions PAGEREF _Toc11920581 \h 10Diversification of portfolio PAGEREF _Toc11920582 \h 10New markets PAGEREF _Toc11920583 \h 10Tax PAGEREF _Toc11920584 \h 10Political instability PAGEREF _Toc11920585 \h 10Finance Foreign Trade PAGEREF _Toc11920586 \h 11Timely cross-border payments PAGEREF _Toc11920587 \h 11Mitigations of risks PAGEREF _Toc11920588 \h 11Expensive PAGEREF _Toc11920589 \h 11Less accessibility PAGEREF _Toc11920590 \h 11IV.The International Monetary System PAGEREF _Toc11920591 \h 11V.Foreign Trade in Transaction, Translation and Economic Exposures PAGEREF _Toc11920592 \h 12Transaction Exposure PAGEREF _Toc11920593 \h 12Translation Exposure PAGEREF _Toc11920594 \h 12Economic Exposure PAGEREF _Toc11920595 \h 12Summary PAGEREF _Toc11920596 \h 13Conclusion PAGEREF _Toc11920597 \h 13References PAGEREF _Toc11920598 \h 14
Global Finance Signature
Introduction
The level and health of a country’s economy are determined by the foreign exchange rate among other factors. An economic window provided by the country’s foreign exchange rate is usually monitored and analyzed for stability. Anyone that is interested in engaging in international money transfer should always check the currency exchange rates. The foreign exchange rate is referred to as, the rate used to convert a country’s currency into another. However, the rate is usually unstable because of the currencies inflows from one country to another. This paper focuses on the concept of global finance, the balance of payments, foreign direct investment, the international monetary system and foreign trade in transaction, translation and economic exposures.
* Global Finance
Inflation Rates
A change in the rate of currency exchange may occur due to the changes in market inflation. Value of currency is likely to appreciate if the inflation rate of the country is low compared to another. This occurs because lower inflation rates encourage a slow increase in the prices of goods and services. Therefore, a country that registers high rates of inflation is likely to see depreciation in its currency because of the high interest rates. On the other hand, a country that records an increasing value of a currency is said to have a consistently lower rate of inflation (Turner, 2016).
Interest Rates
The dollar exchange rate and currency values are affected by changes in the interest rates. There is a correlation between inflation rates, interest rates, and forex rates. For this reason, a rise in exchange rates can be caused by higher lending rates. When interest rates increase, the value of the currency of that country appreciates, leading to accumulation of more foreign capital.
Country’s Current Account/Balance of Payments
The foreign exchange rate can also be determined by monitoring a country’s current account. The current account gives a reflection of the earnings on foreign investments and the balance of trade. There are many transactions that happen in the account: transactions on imports, debts, and exports. A depreciation in currency value may be seen when the current account registers a deficit. The deficit comes in due to higher spending on import products more than revenue earned from exports (Carrad-Bravo, 2003).
Government Debt
The central government owns any government debt, which is public debt. Following this, inflation may occur in an economy that is may not acquire foreign capital due to government debt. The debt is likely to adversely affect foreign investors. As a result, the investors may opt to sell bonds in the open market given the market predictions on government debt.
Terms of Trade
Terms of trade are referred to as the ratio of prices of exports to prices of imports. The term is also related to balance of payments and current account. Therefore, the terms of trade of a country may rise when export prices increase at a higher rate compared to import prices. Consequently, the country may register higher revenues. Higher demand for currency will be created, which will, in turn, increase the value of the currency. When the value of currency increases, the rate of exchange appreciates.
Hedging Foreign Exchange
The hedging transaction exposure can be achieved by buying or selling foreign currency payables or receivables through a forward contract. Similarly, when lending or borrowing the current value of currency payables or receivables, money market hedge is achieved. The achieved money market hedge offsets the foreign currency positions. Essentially, the two methods of hedging may be considered equivalent if the interest rate parity is holding.
Sample financial derivative;
Let the present value (PV) be ¥250 million
250 M/ 1.0175 = ¥245, 700, 245.70
From the above calculations, the amount payable would be ¥ 25 M at the date of maturity of a three-month investment at the Japanese interest rate. Therefore, the cost of buying the above yen will amount to; $ 2, 340, 002.34 = ¥245, 700, 245.70/105. The cost of meeting the yen obligation will amount to, $2, 340, 002.34
Transaction

CF0

CF1

Use dollar to buy yen spot

-$2,340,002.34
$245,700,245.70


Investment in Japan

-¥245,700,245.70

¥250,000,000

Paid Yen


-¥250,000,000

Net cash flow -$2,340,002.34

There are several benefits that accrue from international financing. Among the main benefits is the possibility of harmonization and comparability of statements and information regarding international financing. The flow of international investment is usually curtailed by the unreliability of foreign financial statements. However, the concept of comparability eliminates the problems and gives way to smooth international operations. A lot of money is usually spent on consolidating different financial information. Additional, various sets of reports as well as numerous national practice and laws must be followed. Therefore, as part of international financing, harmonization of financial statements is likely to save more time and money. Secondly, there is a likelihood of improvement in the required standards of accounting across the globe (Carrada-Bravo, 2003). For this reason, the standards may be raised to high levels for consistency with social, legal and economic conditions.
More benefits may accrue to countries without enough codified accounting and auditing standards: firms that have at least one subsidiary in a foreign country is likely to benefit from international accountancy firms. Financial statements of foreign countries may become easily understood by foreign lenders. As a result, more foreign capital may be raised through investors, with the help of financial analysts. Following this, foreign firms are likely to make informed investment decisions given the available investment opportunities in other markets.
Customer preference; Multinationals may decide to become global given the existing customer preferences. At the moment, both regional and national preferences fail to concur with homogeneity caused by travel, communication, and technology. There is a high rate of homogeneity in terms of preference- in many countries, products and services are becoming more similar in structure. However, the trend is not restricted to products based on technology such as computer peripherals and pharmaceuticals. A multinational may decide to brand its products and sell it globally just like Adidas sportswear and Corona beer.
Economies of Scale; A multinational may also decide to become global because of the...