Research Articles Base: Foreign Exchange

Foreign Exchange

I.             Introduction   Globalization has been considered as the main culprit in the current situation of international trading nowadays. To those who have faith and accept the rationale of globalization, the observable fact has accomplished a number of important contributions in shifting the situation of the world. Majority of experts possess the same opinion that it has developed communication, transportation, and information technologies internationally. (2000) With the exception of the above-mentioned advantages, it has similarly tendered benefits in trade. Similarly, periods of intensifying international trade have commonly been times of financial development. However, there are still risks in exposure in the international market. In this context, this study will look into the management of those risks. Specifically, the study will take into account the foreign exchange risk management techniques that are used in the United States. In the same manner, to closely delve into the matter, the said risk will also be discussed so as to effectively provide recommendations at the end of the paper. II.           Management of Foreign Exchange Risk Before discussing the main management of the risks posed by foreign exchange exposure, a close discussion on the actual risk is in order. According to (1996) there are three types of foreign exchange risks. These risks include structural risk, transaction risk, and portfolio risks. A structural risk represents a variance in the inflow and outflow of cash based on the currency difference which may well be caused by fluctuations in the foreign exchange rate. On the other hand, a transactions risk results from the time lags present in any international transaction. Specifically, the risks involve when the parties commit to pay and when it actually makes the necessary imbursement in the transaction. The third represents the issue when a specific company operates using different currencies. This is actually possible in multinational companies that operate in different parts of the globe. To illustrate, companies with US based headquarters will have a risk involving the profit and cash flows of their companies that operate in another country which uses a currency different from the dollar amount. This means that there is the possibility that a higher or lower operating profit may ensue when it is converted to the parent currency, in this case US dollars.     III.         Foreign Exchange Risk Management There  are specific strategies that are taken by US multinational firms to manage the risk of foreign exchange. One of them is pricing. This means that companies could control the risk by imposing a billing currency. They could similarly do this by billing their customers with the same currency that the company uses in its operations. ( 2003) Another strategy is settlement. This is used when a company is not able to use its parent currency. The objective is to continuously negotiate early payments from the other company so as to remove any risk provided by the changes in foreign exchange. ( 2002) Forward contracts could also be used as an alternative strategy to mitigate the risk involved in foreign exchange. This strategy is taken when the previous two is not viable. ( 2001) Specifically, the said strategy is to impose a contract to purchase or sell foreign currency any time at the future given a fixed exchange rate. This is a hedging technique that allows companies to accommodate risk-averse counterparts into forming contractual relationship with them. Another common technique is netting. This technique is applicable to a group of related companies. This technique requires a reduction of foreign exchange conversion fees and fund transfer fees and a much shorter span of settlement in terms of the payables among those involved. (2000)          IV.        Conclusion   Apparently, the existence of free trade and exposure to foreign exchange provides an advantage to everyone considering the open access to goods and services that is able to grant states with the most favorable opportunities for development. However, in a more realistic sense, the emergence of globalization favors predominantly the wealthy nations. It is possible that these countries, given their influence in the international community, are able to manipulate to their advantage the rules regarding trade. (2000) In this context, the economic institutions of the international community are thus being possibly controlled by the powerful nations especially when the subject of foreign exchange is taken into consideration. Companies from less powerful and influential countries are subject to the said risks. And based on the discussions above, there are indeed several courses of action that could be taken to avoid these. The effectiveness and applicability of the said courses of action to nations other than the United States have yet to present itself, thus, it is the contention of this paper to recommend further study on the said matter.      V.          Recommendation Based on the discussions above, it appears that the risk among the players in the industry is highest at the settlement of the accounts between companies. This study intends to provide a couple of recommendations to minimize the said risk. A.  Take away any form of delay In this suggestion, a considerable amount of changes will be needed in the way international payments are carried out. One major change is the requirement to close down the gaps in the hours of operations of payment systems in countries. This means that some sort of standardization of the payment systems across countries is needed in order to provide a uniform means of payment especially when a particular kind of currency is involved. Similarly, this course of action needs a verification system that will ensure the permanent nature of the payments made and the possibility for the parties involved to make use of the said monetary provisions once they are acquired from their counterpart. This means that specific policy changes in the central banks of every state would possibly be in order.   B.  Reduction of size The need of a solid clearing bank that will cater to every nation is conceived to be the answer for any risk in foreign exchange transactions. Though there is still yet any indication on whether such a well build clearing bank does exist, netting arrangements are taken as a viable substitute. It in this situation that contracts among parties are taken into a clearinghouse arrangement and enables the parties to be secure in their settlement arrangements particularly with respect to the currencies used in the transactions. In this manner, the risk is significantly reduced by reducing the size of the transactions among the parties.           Credit:ivythesis.typepad.com

Foreign Exchange

I. Introduction Globalization has been considered as the main culprit in the current situation of internationa...

Managing Balance of Payment Deficit

Managing Balance of Payment Deficit   Introduction             When the exchange rates are not stabilized by government authorities, the Flexible Exchange market closely resembles the theoretical model of perfect competition.  There will be a large number of buyers and sellers who act as price takers.  Accordingly, the exchange rates are determined by demand and supply in the Flexible Exchange market.  In cases of Fixed Exchange rates, government officials try to keep the rate stable and have to get rid of the excess supply or demand at specific prices using international reserve assets. Debit transactions involve payments by domestic residents to foreign residents (i.e. imports of merchandise, foreign transportation services, purchases of local residents traveling abroad, foreign investment by home residents).  Credit transactions, on the other hand, involve receipts by domestic residents from foreign residents.  These factors and modifications can directly cause a deficit in Balance of Payment if improperly managed ().  Tariffs and Quotas             Government has the options of imposing tariffs on a specific situation.  According to  on his upcoming book “Advanced International Trade: Theory and Evidence”, there are three situations of this imposition of tariffs: (a.) to protect fledging domestic industries from foreign competition; (b.) to protect aging and inefficient domestic industries from foreign competition; and (c.) to protect domestic producers from dumping by foreign companies or governments.  Apparently, the implication of tariffs and quotas on imports would significantly facilitate immediate domestic recovery in Balance of Payment deficit   Managing the Balance of Payment Deficit             As the Balance of Payment is getting worse, it appears that the risk of a crisis is indeed serious.  The present situation of the subsidiary would be less sustainable without proper management of the deficit.  The aim would be to recover, minimize, and profit from the current loss by making it an Ownership Society rather than Sharecropper’s Society (perpetually paying tribute to foreign creditors and owners).  The initial solution would be the depreciation of the exchange rate of the host country.  Depreciation or devaluation of the domestic currency carries two advantages for the subsidiary.  Firstly, it will improve the competitiveness of domestic products, and eventually lead to an increase in exports and lower imports.  A government’s implementation of tariffs and quotas on imports would also greatly help in achieving this measure.  It would be a good way to shrink the current account deficit without any significant negative impact on the domestic economy.  Secondly, it would reduce the burden of the current debt faced by the subsidiary.       The exchange rate is not more of a cause but an indication.  What really drives a current account deficit is the balance between the subsidiary savings and investment – put differently, the balance between domestic spending and income. The government then plays a vital role of implementing reforms to contain the increasing deficits.  Their job would not be only through tariffs and quotas on imports but harmonizing currency interventions to manage the exchange rate and ensure that any further depreciation of the currency will not turn into a destabilizing run.   When this cooperation between the subsidiary and the government will be met, there will then be an increase in national savings thus reducing dependence on foreign borrowing.    Credit:ivythesis.typepad.com

Managing Balance of Payment Deficit

Managing Balance of Payment Deficit Introduction When the exchange rates are not stabilized by government authorities, ...

Foreign Exchange

Overview             Offshore banking has made its presence felt over the years because of its immense potential ( 2007(b). An offshore bank is a bank located outside the country of residence. It is simply banking in other government’s or state’s jurisdiction.             The main characteristics of offshore banking are familiarity with offshore and international business, worldwide investment and business perspective, tax-efficiency, confidentiality, lack of foreign exchange controls and access to special investment opportunities.              The companies, corporations and individuals are highly-motivated by tax and cost reduction, asset protection and enhancement, risk management, privacy maintenance and avoiding bureaucracy to divert into offshoring. There are so many reasons to go offshore: 1) free remittance of profits and capitals, 2) access to tax treaties, 3) customs and duty exemptions, 4) sanctity of contracts, 6)  security of property rights and 7) tested legal systems.             Moreover, offshoring can be applied to trading, investment, financing, professional services and consultancies, patent, royalty and copyright holding, ship management and yacht owning and personal and corporate tax planning (2007). Advantages             Offshore banking provides access to countries with stable political and economic jurisdictions. Due to lower overheads and a lack of government intervention, some offshore banks may operate on low-cost, high-interest rates. Further, interests are paid without tax deduction.             Offshore banks offer services such as anonymous bank accounts, higher or lower rate loans based on risks and investment opportunities that can not be provided by domestic banks. The linkage between offshore banks and offshore companies, trusts or foundations provide specific tax advantages for individuals.             In addition, the geographically remote island nations can competitively involve. As such, offshore banking can help developing countries to source investment and to create growth in their domestic economies in aid of redistribution of world finance (2006).             In a global world telecommunications, setting up an account is so easy via on-line, phone or e-mail. The process ensures an access to your money and bank account anytime anywhere. Thus, allowing you to invest in more number of products and services across the word. Disadvantages             Offshore banking is more accessible to those on higher incomes due to the cost of establishing and maintaining an account. The tax burden, on the other hand, tends on the middle-income groups. Aside form this, developing countries might suffer because of the speed the money can be transferred in and out of their economy. Offshore banking can increase the problems regarding financial disturbance ( 2006).             However, the phenomenon is not of free-risks. You need to comply and abide to tax laws of your own country and the offshore country. Also, you are required to deposit a big amount to have an account and your money is at stake if something goes wrong in that country. Criticisms             Many critics argue that offshore banking is inappropriate since it offers a competitive threat to the banking and taxation systems in developed countries. It has been associated with the underground economy and organized crimes. The illegal concept, according to them, serves as a host to tax evaders and money-launderers because they have a choice whether to report income to other tax authorities or to decide not to. Since they are protected by bank secrecy law, they have no legal obligations to do so.              In contrast, the defenders of offshore banking criticized attempts at regulation. According to them, the process is prompted by the desire of domestic banks and tax agencies to access the money placed in offshore accounts. Many advocates also assert that tax and banking competition is an advantage because it allows the people to choose a balance between services and taxes.             However, the counter claim is that it is a disadvantage that encourages a “race to the bottom” approach wherein developing countries are pressured to deregulate own banking system to prevent capital offshoring. Furthermore, there is an evident tax imbalance between high- and middle-income groups, thus, equity is being sacrificed.             The biggest question would be: Who really benefits from offshore banking? Analysis and Evaluation             Having an offshore account is the ‘in’ thing today (2007, (a). Over the years, it became the buzzword in business, trade and investment. The purposes and intent of offshore banking produces an array of argument largely because of its vulnerability to ‘illegalities’ and regulation distortion.             Many believed that moving an asset offshore regains control. In American context, one should act according to federal rules and the offshoring concept place the entire jurisdiction of your money at your hands. It has to do basically with access to information which provides an escape form governmental conspiracy and jeopardy through favourable accounting and economic exposures.             The biggest motivating factor of offshore banking is foreign profits in an atmosphere of complete confidentiality ( 2007). The idea is safeguarding your assets legally through secrecy laws that forbid bureaucratic reviews of personal financial records.             Perhaps, it does provide control but limited to those who can afford and maintain an offshore account. These are: expatriates, rich and non-residents. Thus, offshore banking reflects people’s dissatisfaction on prevalent tax and banking systems within the domestic borders. Even more to the point, the perception of the people regarding the right institutions like the government, the laws and the authorities inside and outside a specific country benefits and hinders offshore banking.             The financial freedom is taking different meanings to those who earned money in good faith and those that are illegally-obtained. The more the money is hard-earned the more a person wants to guard and protect it. Likewise, if it is from illegal activities, the more you want to hide and the more you will need a legal right to privacy. The choice of the latter would be an offshore account.             Likewise, such offshoring elevates financial decisions which are beyond the reach of domestic rules, regulations and scrutiny. To do away with aggressive competitors, the companies’, businesses’ and other organization’s resort is an offshore account. In the process, they can convert files into financial information and placed it in an offshore account. So, the information will be protected under the foreign jurisdiction (2007).             Unlike in a domestic setting, the step-by-step legal process of patent and disclosure is rather complicated since it involves different departments and authorities. Offshore centers, however, can guarantee that confidentiality and privacy. So, most of the people are considering an option to do offshore.             While you are personally-managing the risks of your finances, the offshore banks are also doing everything they can to protect, maintain and sustain the value of your money. Most of the people who chose to have an offshore account are also maximizing their investment opportunities at a lower and sometimes no cost at all.             In this regard, the greater risk regarding offshore banking comes with choosing a bank to open an account. The company must be stable and must comply with international standards set by the Financial Actions Task Force and Organization for Economic Development. There is a probability that an account would be frozen and inaccessible if the companies would not comply.             The constraint, somehow, is that the domestic banks and government are losing a lot because of offshoring. The United States reported a total lost of billion annually (2007). The tax liability is diminished at the expense of middle- and low-income groups.             To wit, the people within countries with high-taxation scheme are more offshore-inclined.  The larger benefit is vested on the countries and the people of such countries where offshore banks are residing. The impact of offshore banking centers on the host countries ( 1985). Recommendations             There are so many prevailing laws regarding financial schemes, money laundering and tax evasions. The government, state and other authorities must commit in implementing those laws because offshore banks will never initiate on investigating their depositors’ background. So, the reports and investigations regarding suspicious accounts must be taken through country-specific schema since the transparency of offshore banking is relatively impossible.             The domestic banks must strategize on providing similar services that are provided by offshore banks.  If possible, the government should decrease the tax burdens of its people or at least engage in tax neutrality.             The government should also provide regulatory advantages among its people, investors and domestic industries. In domestic business environment, restrictions and policies can affect business productivity and valuable resources. They should strive at jurisdictions that are business-friendly, straightforward and inexpensive to comply with (2006).              The value of currency changes frequently, so, depositors must really keep a close eye. Such changes affect international transactions including the offshore banks assets, liabilities and cash flows. It is very important to look at the financial stability of offshore banks and the process of their compliance to laws.             Depositors should not be motivated by high profits alone, instead, the proper motivation must be the benefits of opening an offshore account in the long run. We should remember that the real operating exposures of such banks depend widely on value of currency. Therefore, depositors should manage hedging, adaptation in economic strategies and accounting aspects of offshore banks ( 2007).                Credit:ivythesis.typepad.com

Foreign Exchange

Overview Offshore banking has made its presence felt over the years because of its immense potential ( 2007(b). An offshore ...

A Currency War Analysis of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi

A Currency War Analysis of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi In any countries across the globe, the fiscal and monetary policies seek at achieving relative macroeconomic stability. The monetary policy framework in various countries around the globe is more than the objective of monetary policy is price and exchange rate stability. The monetary strategy in the inflation management is based on the view that inflation is essentially a monetary phenomenon. The economies target the money supply and its growth can be the main objective of the price stability. In order to promote the appropriate methods in monetary policy, the supply growth is firstly considered in targeting the inflation. With this, the USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi are battling each other to increase their stability in the global market. In accordance to the currency wars, performances of widely used currencies are assessed based on their exchange rate value.  According to Irwin (2002), the function of the exchange rate is to equate supply and demand. Exchange rate is much more than an ordinary price it is between the price structure of one country and those of all others, and thus between the national economy and the world economy. An inappropriate exchange rate affects the relation of domestic to foreign prices of a wide range of goods and services and to some extent the relation of one group of domestic prices to others. A substantially inappropriate exchange rate for a prolonged period would seriously disturb the economy. For Salvatore (1993), exchange rates as the country’s international transactions are an integral part of its economy because it has a significant effect as they affect as they affect output and employment, prices and real income, and money and capital markets. From there, the primary function of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi is to help bring about such a pattern of international trade and capital flows. That function, it should be emphasized, is the same whether a country has a fixed par value or a freely fluctuating exchange rate for its currency. While Dreyer (2004) states that exchange rate is considered one of the most significant international economic developments. According to him, decades ago there had been breakdown of the system of adjustably pegged exchange rates on which the post-war international monetary system had been based and the widespread adoption of more flexible exchange rates. And by the fall by of 1975 there is an experience accumulated sufficient with the new system of flexible exchange rates to attempt a major effort at evaluation of the initial performance of floating rates. The US dollar has four main objectives: ·         Remain one of the top currencies in the world. Being one of the top currencies enables the dollar and the US to command the respect and confidence of other nations. Thus, the US is able to expand its operations through the continued strengthening of the US dollar. ·         For the US to gain more profit than other powerhouse nations. The US dollar currency that is being used in the trading process used all over the world is able to meet high quality standards. As a result, the US is able to earn more profit as against other industrialized nations (El-Agraa, 2004). ·         Build the best currency portfolio, with the US dollar as the international currency of flagship; and ·         Maintaining its independence. Being an independent currency allows the US dollar to continue its tradition of excellence in both its ability to purchase products and services by setting new trends and standards. In order to achieve these objectives, the US implements a strategy of selling a combination of local brands and international brands, but maintaining the US dollar as the flagship currency. The US also aims for broader positions as well as either the top or secondary positions in any market. Any of these positions would be enough for the US to deliver a high level in terms of production, marketing and distribution using the US dollar (Yarbrough & Yarbrough, 2006). Moreover, these positions create a platform from which the US can sell or trade their premium and other specialty products. With a continued focus on the structures of the costs, the above mentioned objectives should undoubtedly be reached. It is said that the currency wars between USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi has been considered as a major contributing factor that enhances the global market. To be able to prevent an economic chaos during currency wars, different policymakers from the monetary and fiscal sectors have been able to do their very best to solve the issue. Accordingly, the initial responses for the currency wars to avoid any financial crisis should be made by the central banks which increased the availability and accessibility of the short-term financial funding with their domestic financial system and eased monetary policy with the intention and aims for limiting the fallout from the financial system in line with the real economy. Aside from this, fiscal policies have also been employed to shore up the financial fields through the measurement which aims on bolstering the balance sheets of the weaker sectors.   References: Dreyer, G. (2004). A Single Currency for Asia?, Asian Development Bank, viewed 04 February 2011, <http://www.adb.org/Documents/Periodicals/ADB_Review/2004/vol36-4/a-single-currency.asp>. El-Agraa, A. (2004). European Union, Harlow: Prentice Hall Irwin, D. A. (2002). Free trade under fire, Woodstock : Princeton University Press. Salvatore, D. (1993). Protectionism and World Welfare, Cambridge: Cambridge University Press. Yarbrough, B.V. & Yarbrough, R.M. (2006). The World Economy. Trade and Finance. London: Thomson South−Western.   Credit:ivythesis.typepad.com

A Currency War Analysis of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi

A Currency War Analysis of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi In any countries across the globe, the fiscal and m...

The Determinants of Nominal Exchange Rates – An Empirical Analysis

THE DETERMINANTS OF NOMINAL EXCHANGE RATE         Nominal exchange rates are the number of units of currency from a country that can be exchange from another country according to their given value, given value is computed according to their economic position which may change in time. There are many factors that can determine the changes of exchange rate since currency has an equal amount from any other parts of the world therefore its determining factors is the source of it.       Understanding the daily increase and decrease of currency cannot be predicted in a single determinant but through economic variables of constantly changing phase. Countries all over the world are mostly included and interrelated with each other, that is why changes from a currency of other country can also change the other or vice versa. In simple term the nominal exchange rate can be determine by the country’s supply and demand factors which include the following:       1. Difference in inflation – Inflation is cause by a rising price of commodity in a certain country. A nominal exchange rate can easily be determined by a countries exchange rate through differences in inflation. A country with minimal inflation rate can expect a high currency exchange like Germany and Switzerland but on the other side, a country with a rising inflation rate like Philippines can expect a low currency exchange rate therefore purchasing power of a low inflation rate countries also increases while the country with high inflation causes them to have a low purchasing power.         2. Difference in Interest rate – This a charged rate for a borrowed capital that is paid annually. A certain country who borrowed money from International Monetary Fund or World Bank needs to pay their interest rate aside from their principal debt. For example a country like Rwanda borrowed 1 million dollars that they need to pay within ten years. Therefore they will be given for example a 10% interest rate which is 100,000 dollars that they need to pay annually before paying the principal amount. This situation may cause an increase in price of basic commodity and therefore high inflation which causes a nominal or low currency exchange rate of a particular country.       3. Current account deficit – This is a balance of trade within a country and its partner and how they interact and exchange goods and services. Current account deficit simply means a low export of domestic product and more imports of goods from other country       If a particular country spends more on foreign trade than generating revenue, they may lack capital that may force them to borrow money through foreign sources that makes a deficit, therefore the country may experience high inflation rate. This will make the country in deep burden and domestic asset may go to foreign ownership somehow makes it a part of their payment.            4. Government or public debt – Countries may need funding for their project in construction and industrialization that results in government debt to foreign country such as World Bank or International Monetary Fund. Somehow their project can administer domestic growth; international perception would be a country in debt. If this particular country may not be able to suffice their payment in time they may be force to borrow more and therefore decreasing a chance for foreign investor. High government indebtedness may produce a negative effect to the international market and therefore disrupt investors that may affect their production therefore large debt may attract high inflation that lower their currency exchange rate.       5. Political Stability and Performance – Foreign investors can be easily attracted to seek highly established countries and those who have gather a strong political trust, Political turmoil, peace and order even environmental occurrences may cause a loss of confidence in investors and therefore low exports and dollar revenue generation that causes a country to fall from domestic and international trade.         6. Import Export determinant – If the country’s export rises more than imports then the country’s trading may be improved and they can generate bigger revenue that may demand a currency increased value and therefore decreases inflation which in turn produced a stable economic perspective and higher trading. But if Import rises more than export then you can expect another economic decline and low currency exchange rate.       In an overall perspective the exchange rate determining factor in a country’s economic condition has a number of diverse and complex factors; it is the government and the people who are liable in recovering and empowering their country to be productive in enriching their investment and raising their position through international and foreign trade. They are the only one who knows and understand their position towards economic performance and growth. Credit:ivythesis.typepad.com

The Determinants of Nominal Exchange Rates – An Empirical Analysis

THE DETERMINANTS OF NOMINAL EXCHANGE RATE Nominal exchange rates are the number of units of currency from a country that can be e...

The Determinants of Nominal Exchange Rates – An Empirical Analysis

The Determinants of Nominal Exchange Rates – An Empirical Analysis

THE DETERMINANTS OF NOMINAL EXCHANGE RATE Nominal exchange rates are the number of units of currency from a country that can be e...

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