A manager needs to: monitor the economic cycle to ensure the same amount of flexibility in foreign countries as there is in the US.
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 more stable in the US than it is in other countries. With that being said, you must understand how independent the central bank is in that country. You need to monitor the interests rates at the central bank.
Example: higher oil price increases production costs which could lead to a recession. When profits decrease, production decreases and workers start to get laid off. Demand for goods and services then decrease because less people can afford it.
Having a couple commodities that are heavily relied on in a small country could greatly impact the country if the price of the commodities change. Rising prices of these commodities would positively impact small countries.
Countries who rely heavily on trade with another country, so it’s important to monitor other countries markets because it could impact another countries market including your own country. This is more likely to happen between smaller countries.
fluctuating local currencies values. Exchange rate fluctuations can make overseas profits translate into more dollars or fewer dollars as well as change the profitability of overseas operations.
poses a risk to companies that have foreign operations. Foreign exchange controls that limit a corporations ability to move money around the world are often imposed during a crisis.
lead to Serious risks to companies operating overseas. This means political volatility must be monitored carefully before making large foreign investments.
you need to consider the foreign exchange rate risk, political risk, the risk of war and the commodity risk
strategy for a recession varies depending on whether the company is selling to the local market or using the foreign country to produce for the home market.
Similar to the US, an early warning system should be established for every foreign country but will include foreign exchange risk. In countries that are less developed the system will also need to include foreign exchange crisis, war and political disruption, commodity risk, and trading partner risk.
a plan to build flexibility into a business to prepare for recession Including elements of a domestic plan, plans for the various exchange rates and capital flow risks.
When you want to expand your business into foreign markets there a lot of risk that must be considered. To reduce this risk of operating in foreign markets is diversification. Spread the risk to other countries, not just in one place.
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.
is exchange rate between two countries currency
the exchange rate is fixed. The government intervenes in the market a counters the markets forces by buying and selling local currency, maintaining the fixed exchanged rate between the currencies
the decline in the currencies value in the pegged exchange rate system. the government is lowering the value of currency when its fixed.
the exchange rate between the two currencies is determined in the free market by market forces of demand and supply
the value of a currency declining in the free floating exchange rate system
also known as capital control. the government implements foreign exchange control when it faces a “financial crisis” (the value of the local currency plummets disrupting the local economy). An example of this when the government bans the use of foreign currency in a country.
is law of one price extended to the world economy. the law of one price means an identical product should sell at the same price at different places.
The identical product should sell at the same price when the currencies are converted to one currency.
Describe the characteristics of the following events briefly.
The Mexican government devaluation of the peso against the US dollar led to a significant financial crisis. Ernesto Zedillo, the new president, let the peso decline from 1/3 of a dollar to 1/10 of a dollar. The decline in the currencies value in the pegged exchange rate system are imposed during financial crisis.
The Indonesian financial crisis of 1998 was a good example of how foreign exchange crisis can lead to domestic recession. The Indonesian manufacturing sector relied heavily on bank credit for financing. The devaluation of the Rupiah caused debts to go unpaid.
The currency crisis began because a series of currency devaluations were set off. Asian companies became bankrupt because the value of currency compared to the dollar. This eventually led to a financial crisis that quickly spread becoming a global crisis.