A manager needs to:
Understand both the business and economic cycle of other countries and the world in general.
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 |
Monetary policy is the actions a country takes to handle its money. The underlying attitude towards the role of the monetary policy varies between each country. Though, in a lot of them the monetary policy serves the short-run political interest of the country.
Supply shock happens all around the world. The most common one being oil crisis. The severity of supply shock dependence on the amount needed from other countries.
Countries that are dependent on multiple commodities are more volatile and more prone to extreme cycles where prices fluctuate because of them.
Smaller countries or countries that export the majority of their goods are at a higher level of risk than the ones that are more diverse. It therefore makes them more volatile to recessions.
Foreign exchange rate is a big factor in the risk that companies that conduct their business in other countries faces. Profits can be diluted by the exchange rate and can lead to company losses. At the same time, it can yield a bigger profit for the company.
the two biggest risks in a foreign financial crisis is that the business profits and capital could be locked up in the country, unable to be transferred. The other one is a potential recession in the target market. This could lead to companies that were fundamentally sound being sent in to chaos.
In the majority of the cases, war is not good for business. Especially for the country that gets invaded. Businesses that have their assets in those countries are at a risk of having them destroyed or ransacked. This shows how important political stability is for a country and its market.
Depending on how the business is conducted in the country will change how the cycle affect the business itself. If the goods is only produced there the business will not be affected the same in a recession compared to if the business sold their goods in that country. The recession strategy for the business that only produce their goods in that country should look for local suppliers to use them in case of a possible downturn in the other country. While the business that conduct their business in the other country should plan their recession strategy in the same as they plan it for their other countries.
A monitoring and a early warning system should always be established for countries where business is being held. While the warning systems in developed countries will look similar to the ones in America, the systems in less developed countries have to be adjusted and cover more variables.
The contingency plans for other countries are the same as the ones in America, except for the added plans for the exchange rate and capital flow risks. Plans should also be added in case of changing of supply chains is needed.
The economic fluctuations are different from every country, especially in countries less developed. The actions needed to be taken are wider than the ones needed in America. Every business vary when it comes down to how they should handle their business and contingency plans.
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.
It is the rate between different currencies and affect how money can be traded and moved between countries.
A pegged exchange rate is a rate set by the government between two currencies.
A floating exchange rate is affected by supply and demand on the open market.
Currency devaluation is when the total volume of said currency is diminished.
Currency depreciation is a fall of the value of a currency.
Foreign exchange controls are rules for foreign purchases and sales.
PPPs are rates of currency that tries to remove any differences in pricing due to exchange rates.
Describe the characteristics of the following events briefly.
Though both domestic and international economic factors, along with political forces helped the Mexican peso crisis was a currency crisis that got started by the Mexican government. The Mexican government suddenly did a devaluation of the peso against the American dollar. This also lead to other currencies in Latin America to decline as well. What occurred was that the central bank began converting short-term debt, denominated in pesos, into dollar-denominated bonds. This conversion resulted in a decrease in foreign reserves and an increase in debt.
After a lot of pressure on the Indonesian rupiah, the currency was allowed to float freely at the start of August, 1997. This floating exchange rate would be detrimental for the rupiah as it very soon after started to depreciate drastically. At the beginning of the new year the rupiah had lost 70 % of its original value.
The Asian financial crisis started in Thailand, then quickly spread to neighboring economies. It all started with Bangkok unpegged the Thai baht from the American dollar. This would lead to a currency crisis as the baht quickly started to drop in value. This event would set off a series of currency devaluations and lead to massive flights of capital.