A manager needs to: As a manger it is important to monitor foreign markets. Even though the correlation is not perfect, howver, it is important to monitor foriegn exchanrate rate risk as well
For a major industrialized country, the monitoring system would closely resemble that used in the United States with an addition of foreign exchange risk.
For a less developed country,
| Risk | Indicators |
|---|---|
| monetary policy | varies depending on individual countries |
| foreign exchange risk | divergence between PPP and actual exchange rate |
| capital control | country’s bond credit ratings and stock exchange prices |
| oil | know how dependent the country is on imported oil |
| commodity | commodity price |
| trading partner risk | know who the major trading partners are (including tourism) |
| war or rebellion | local press |
The most important thing to remember when monitoring foreign exchange rates around the world is that while countries mirror each out financially, the way each countries economy and government is run is different on a country by country basis.
Supply shocks are something that every country who heavily relies on imports of a specific product. If a country was suddenly unable to import a foreign good, the price of said foreign good will skyrocket due to supply and demand.
When a country is overdependent on a single commodity the economic success of that nation will rise and fall depending on the commodities foreign market. There is little government intervention can do to impact the success of the commodity, this can be a good or a bad thing depending on the competency of the government.
It is important to not put “all your eggs in one basket” regardless of the scenario, this is especially true when trade between foreign countries. A great example of this is how since Canada sends 85% of their exports to the United States. This means that Canada is heavily dependent upon the United States economic health. If the US is entering a recession, they will not be able to maintain their import of Canadian products.
Any company with overseas operations is especially susceptible to changes in foreign exchange rates. This is an especially difficult problem to deal with do the exchange rates being impossible to accurately forecast.
Financial crisis pose two very different risks to those companies selling their goods or services overseas. More often than not the most devastating risk, is the risk of a recession in a target market. The more annoying yet more predictable risk is that of politics within foreign country that maybe be targeted to hurt your business.
War and revolutions have effected the markets for as long as our current monetary system has existed. Both war and revolutions negatively impact every major industry because of both harsh government regulations and taxes increases, as well as, consumers inability to spend money.
Strategy for dealing with foreign recessions can vary wildly depending on the businesses activity. If the overseas operation is selling into the same foreign market, the standard steps to deal with a recession apply. However, if the only foreign activity is production, things get more complicated. This is due to potentially losing local vendors and distributors going out of business.
The monitoring system used foreign markets should be similar to those used in the United States, with only a few differences. For instance, it is important to ask yourself, how is the monetary policy conducted, as well as, what are the key indicators? these will often differ country to country so it is important to have an early warning system for every foreign country of importance. It is also important to be extremely cautious when dealing for less-developed countries as they are much more susceptible to foreign exchange crisis, in addition to their inherent risk to war and political turmoil.
A foreign contingency plan should be similar to a domestic one, with a few more risks to account for. It should be prepaired for to not be able to easily move capital if foreign sancians are imposed. It is also important to realize the risk of small countries commodities, as it can led to extreme shifts in the market. Additionally when dealing with smaller counties it is important to have a contingency plan for all aspects of the supply chain, including utilities.
It is important to remember how rare it is for an economy to be as stable as the United State’s. This is why it is important to be incredibly cautious of foreign markets. A good manager that is dealing in foreign markets must take into account the increase risks of foreign markets while diversifing overseas opperations as much as possible.
Explan each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
A foreign exchange rate is the rate at which one currency is exchanged for another.
A pegged exchange rate is a fixed exchange rate backed by the government.
If a country has a floating exchange rate it is letting its foreign exchange rate fluctuate naturally.
A currency devaluation is when a countries currency has its value lowered within a fixed exchange rate.
Similar to currency devaluation, currency depreciation is when a currency value declines. However, currency deprecation applies to a pegged exchange rate.
Countries impose foreign exchange control or capital control when a country faces a sudden and dramatic decline in their local currency.
Purchasing power parity is when law of one price is extended to the world economy.
Describe the characteristics of the following events briefly.
Up until 1994 the Mexican government has been pegging the peso to the dollar at a ratio of one third a dollar. This was until Mexico’s new president Ernesto Zedillo had the peso transition to a floating currency. This led to the paso’s value to drop from one third of a dollar to one tenth of a dollar.
The Indonesian financial crisis of 1998 was caused by the manufacturing sections entirely relying on bank credit for finance. This was until the rupiah saw its value plumit leding to international banks refusing to lend to Indonesian bankers. This led to the collapse of the Indonesian manufacturing sector, which in turn pulled the rest of the Indonesian economy into a recession.
The Asian financial crisis of 1997-1998 was caused by the majority of large South-East Asian companies had their debt in dollar-denominated debt payments. This meant that with the fall of the Chinese yen many prominate companies from South-East Asian were now unable to repay their debt, not through lack of financial standing but because their debt skyrocketed in value.