A manager needs to: Be able to be diligent and keep a close eye on monitoring its monetary policy.
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 around the world focuses on the centralized institutions of the countries or regional organizations. One organization as such is the European Union. It is used as a way to influence a money supply or as a way to influence the economy.
A supply shock is when there is an event that usually is unexpected like a downturn and eventually will be a key factor to a change of supply with a demand. This will end up changing in a sudden price change which will then shift the demand. This can be a huge downfall for a foreign company who has shipments coming in and out from different countries which could make them more vulnerable to shortages due to material and labor shortages.
Commodity risk in a small country is when there is an uncertainty about the potential market value or the size of incomes in the future that comes from price weaknesses from both directions of the demand and supply change being low or high.
Trading partner risk typically is more affected in smaller countries the reason for this is that there might be risk with-in goods and services provided by their trading partners.
The foreign exchange risk can vary due to different countries carrying different currencies causing them to have a difference in exchange rates causing prices to potentially fluctuate.
Financial crisis-es in a foreign country or countries can pose many risks when providing goods and services overseas. An example of one of these risks is that by having a financial crisis in a foreign country this could potentially cause a recession with-in its market.
War and revolution can potentially create extreme problems for companies that are operating overseas. You must ensure that countries you are operating do not show signs of any revolution this could be a huge issue if there is.
Business strategies during a foreign recession is focused on how the business is doing overall. You can deal with a recession similar to how they are dealt with during a recession in the USA.
The monitoring system is a must when developing a business especially overseas. By creating a monitoring system this will allow developed countries to operate businesses with a system similarly to how american corporations operate them.
Contingency plans are essential when it comes to a business. However; it is to note that foreign countries do face different types of risks than the U.S.A but the fundamental structure of a contingency plan is followed the same across all different countries when faced with a recession.
By taking part in business that is overseas it can be potentially profitable as long as you are able to understand the risks that come with it and are prepared to face them head on when they arise. This is very important to be aware of as starting businesses with-in different countries can be a hit or miss depending on how developed they are.
Explain 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.
Price of currency from the one country to another country
Type of exchange rate in which the currencies value is pegged by monetary authority.
Floating Exchange Rate is the exchange rate that a countries currency can potentially fluctuate to.
when the value of a currency no longer is the same as what it was prior.
when the value of currency changes in the exchange rate between countries
Foreign Exchange Control is control that is brought on by a government on the sale of foreign currencies of its residents, on the currency of its non-residents or any transfers between other countries
The PPP is a measurement of prices between different countries.
Describe the characteristics of the following events briefly.
The Mexican peso crisis of 1994 was started by the Mexican government when they imposed a devulation of the peso against the U.S dollar. This ended up becoming one of their first international crisis-es financially.
The Indonesian financial crisis of 1998 started because of the Thai government in which they had burdened a huge foreign debt. They had ended up causing Indonesian manufacturers to rely on borrowing money from international banks. Due to the devaluation of the rupiah this had caused an issue with companies to be able to pay back their loans to the international banks.
The Asian financial crisis of 1997-1998 started due to restrictions to foreign exchange which had then caused a crisis. This was because Bangkok had unpegged the Thai baht from the U.S dollar which then caused a various amounts of devaluations in currency that led to multiple capital fights.