MODULE 2- INTERNATIONAL FINANCIAL MANAGEMENT-CASE ASSIGNMENT

TRIDENT UNIVERSITY

INTERNATIONAL HUMAN RESOURCE MANAGEMENT

MODULE 2- INTERNATIONAL FINANCIAL MANAGEMENT-CASE ASSIGNMENT

BUS401 INTERNATIONAL BUSINESS

When running a small business in the export sector to Europe, and relying on Euros for every business transaction, a drop in the Euro value will be devastating to the financial ability of the exporter. However, the risk associated with the drop in value of the Euro or any other currency could be mitigated and managed in an effective way. The first option available is to undertake an exchange rate observation for a fixed period to determine the incoming trend in forex exchange. Through this knowledge, the exporter should then avoid making any forward contracts that will involve a fixed value for all export regardless of the exchange rate. This means that in the situation where the Euro will drop, the exporter will not be forced to any contract to retain the same prices but will have to increase the prices of their products to compensate the drop in value of the Euro (Goyal, 2013). This option is quite beneficial especially when the exporter is undertaking big purchases that are extremely prone to any loss in value of the trading currency.

The second option available to the exporter is mixing up the trading currencies. Since the exports are meant for Europe, the use of the Euro can be accompanied by the use of the United State Dollar, which is mostly considered the international trading currency. The use of the dollar will help mitigate the loss associated with the Euro. In the global economy, every single commodity can be purchased or bought using the United States dollar. The shift in value within the global currencies have for a long time presented the notion of a verse-versa reaction between the value of the Euro and the United States dollar (Goyal, 2013). This means that if the Euro is expected to drop, the United States dollar will eventually rise, and if the United States dollar drops, the Euro will subsequently rise. Through using both the Euro and the United States dollar in trading, the exporter will ensure that the losses attributed to the Euro will be cancelled out by the profit of the United States dollar. However, a fifty-fifty use of both currencies should be encouraged in this situation.

The exporter’s third option is to undertake a ‘hedge-like’ transaction with the suppliers. Since most of the export business mostly involves paying for exported goods after arriving at their destination, the exporter can set a fixed value for all the products, but change the medium of payment from Euros to Gold, or any other hedging item. Gold is the most used Hedging and is applicable to an international pricing system mostly in United States dollar (Goyal, 2013). This will ensure that all good exported will be paid a fixed amount of gold, whose prices do not fluctuate so much with the fluctuation of any economy. Even with the drop of the Euro, the exporter will still receive the same amount of gold for the product and later sell the gold in terms of United States dollar.

The final option to the exporter will involve market diversification. It will be extremely beneficial for the exporter to establish new markets out of Europe to ensure that a drop in the Euro will not affect the entire business (Goyal, 2013). The new market will provide some relief to the loss being experienced by the Euro due to the use of different currencies. However, the exporter should ensure that the new markets are not affected directly and adversely by the European market. Some of the most recommendable markets will be the American, Asia, and the African markets.

In a situation where a large multinational company dealing with consumers products and being faced with a major decision on the strategy to employ after the drop in value of the South African and Indonesian currencies, there will be consequences for its production location and marketing strategy. Since, at the same time, the Chinese RMB has dramatically increased in value, an effective solution is practical in this situation. The value drop in the South African and Indonesian currencies tends to signify a diminishing economy that presents different constraints in operation for multinational companies (Shackman, 2015). More resources will need to undertake production as more money will be required to buy the same amount of raw material previously bought. The multinational firm will be advised to close all its production facilities in South Africa and Indonesia if the currency drop is expected to prevail for a long time and move them elsewhere. The marketing strategy employed in Indonesia and South Africa will also be mitigated to reduce cost as the two markets can no longer be considered profitable markets. Any products being sold with South Africa and Indonesia will result to increase in price under the local currencies in order to retain the same value of the consumer products. The increase in prices within the local currencies will be expected to have a drop in sales within the two markets, hence making these two market non-profitable markets (Avadhani, 2010). On the other hand, the growth in value of the Chinese RMB signifies the growth of the Chinese economy, and better terms for Multinational business operations (Shackman, 2015). The increase of the Chinese RMB value means that a little money will be used for production purposes and more profits being gained from the consumer products. The multinational company will be expected to change the location of its production facility to China and later use the global market as the main market for its products (Avadhani, 2010). Due to the reduced cost of doing business in China, the multinational company can be able to market its products in Indonesia and South African and get a profit irrespective of their low currency value.

When predicting the value of any currency, a lot is taken into consideration. In the situation where the foreign country has seen a lot of new foreign investment being undertaken, and the prices of commodity being halved when compared to the United States dollar, the value of the foreign country’s currency is expected to increase dramatically. Since the Big Mac at McDonalds is sold at a half the price of the same product in the United States, this means that the value of the foreign currency is twice as much as that of the United States dollar. The prices of any products within the foreign the country will demand a double price for any transaction made using the United States dollar (Agarwal, 2009). New foreign investments tend to improve the economy of any country and hence the value of the country, as the business environment within the foreign country seems to be more favorable. There are numerous opportunities for business to grow, and new companies to be set up in the foreign country with the increasing value of its currency (Agarwal, 2009). The financial manager in the foreign country will advise the boss in the New York headquarter of the predicted increase in currency value, and hence try to expand the business operations within the foreign country. This would be beneficial to the company, and the New York headquarters as more profits will be expected from the foreign country once its currency has increased and stabilized. A small input in the business expansion will be undertaken for the bigger profits that will be received with the increased currency value.

REFERENCES:

Agarwal, O. (2009). Chapter 5: Foreign exchange risks. International Financial Management. Himalaya Publishing House, Mumbai, IND.

Avadhani, V. (2010). Chapter 7: Management of international transaction exposure. International Financial Management. Himalaya Publishing House, Mumbai, IND

Goyal, A. (2013). Dealing with currency volatility. Businessline

Shackman, J. (2015). The economic and financial environment of international business, International Business Finance, International Trade and Finance.