Economic Growth and Currency Valuation

EconomicGrowth and Currency Valuation

EconomicGrowth and Currency Valuation

Foreignexchange risk denotes the risk that occurs during the fluctuations inthe exchange rates of various currencies in the market. The tradingof dollars is often dictated by various factors including politicalchanges, emergencies, foreign prices, and government policies. Thechanges might swiftly affect the demand and supply of currencies. Assuch, the trader will be prone to high level of risk, especially whenthe changes cannot be predicted. The risk can be deliberately highwhenever trader trades with more than one currency. Internationalbusinesses rely on the import or exports of goods and services thus,they are inherently exposed to foreign exchange risks. Foreigncurrencies should be strictly managed against the fluctuations so asto avoid the loss. For businesses that deliver goods and services,the dangers should always be managed to ensure that the organizationprovides the core services or products without exposing thetransactions of the business to any risks. This paper exploresvarious issues on foreign exchange financial management.

Methodsof Managing Risks in International Business

Asa small business that exports products to Europe, there are variousways of managing risks that can be applied. However, the most commonmethods that could be applied in this scenario include the following.

Forwardexchange contracts

Forwardexchange contracts the business organization to protect itself fromstiff fluctuations that arise during the business transaction bylocking in agreed exchange rate until a suitable agreed day. Thetransaction will only be done for an agreed period (Shackman, 2015).The only major challenge with this method of managing risk is thatbusiness is locked into an agreed contract price even in thesituation where the dollar rises and benefits the trader (DeloitteResearch, 2006).

Perfecthedge

Thismethod works on a principle that the outgoing currencies shouldalways be matched against foreign exchange inflows in the same period(Shackman, 2015). The firm should use a mixture of options and heldstocks to protect against any loss. However, it is not usedfrequently due to the uncertainty of the cash flows as the strategyhinders the benefit capacity of a stock position.

Foreigncurrency options

Here,the businessman will be able to buy foreign currencies under theclear agreement with the seller that allows for a particular right,but the trader will not be obligated to do the transactions in theagreed future date (Deloitte Research, 2006). The approach issignificant in ensuring that the business manages any loss in foreignexchange valuations since it will allow for an exchange of currenciesat a pre-arranged rate. This means that a drop in the value of theEuro would not affect the profitability or the success factors if thebusiness as the proprietor would exchange the currency at a set valueregardless of any fluctuation.

Strategicchanges in marketing

Intoday`s market where the changes of the forex can change overnight,it will be important to have a reliable approach of offering theservice or product in a way that it will outperform the strategies ofthe competitors. The marketing should make numerous strategic changesin marketing to enable the business organization to adapt newchanges. According to Goyal (2013), in a situation where the marketand the industry are promising, the team will need to invest in thebest resources which support particular offering. In a situationwhere the market is pleasing, but the business organization isweaker, the company will be forced to use offering as a steppingstone towards achieving the target goal.

Analysisof the currency

Currenciesoperate under the principle of demand and supply. When there is theexcess supply of the currencies, the buying price reduces. When thereis less supply, the prices of the currencies shoot up. Strengtheningcurrency can be controlled by the government through imposing ofpolicies such as increasing rates of new government bonds. Suchstrategy has higher chances of success than trying to strengthen itsince this will contribute to the inflation (Goyal, 2013 Dalby &ampScott, 20006). The Higher interest rate also has been found toweaken the economy. When the dollar has a potential to rise, it willbe good advice for an investor to invest. One can tell the pricescan increase in future when the demand for the products or servicesis relatively high. For this case, the prices of Big Mac at McDonaldwhich is half what it cost at home country is likely to increase infuture. An essential investment will be necessary so that thebusiness can tap more profits.

Conclusion

Conclusively,it is evident that currencies fluctuate based on variouscircumstances. Sometimes, the value is high while in other times itwill reduce. Investors should seek financial advice regardingcurrencies so that they can make the appropriate decision. In myopinion, International businesses which rely on the import or exportsof goods and services are exposed to foreign exchange risks. Foreigncurrencies should be strictly managed against the fluctuations so asto avoid the loss. For businesses that deliver goods and services,the risks should always be managed to ensure that the organizationprovides the core services or products without exposing thetransactions of the business to any risks. The risks that could bemanaged hence minimizing the chances of losses w1ithin the businessorganization.

Reference

DeloitteResearch (2006). Managingin the face of exchange rate uncertainty: A case for operationalhedging.www.iasplus.com/en/binary/dttpubs/0606exchangeratestudy.pdf

Dlaby,L., &amp Scott, J. (2006).Foreign exchange and international finance. International Business3rd Edition.Thompson Higher Education,USA. http://college.cengage.com/school/ebooks/053849106X/chapter07.pdf

Goyal,A. (2013,). Dealingwith currency volatility.Businessline. [Proquest]

Shackman,J. (2015). Theeconomic and financial environment of international business.Trident University International, Cypress, CA.