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  • Global Business Implications

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    jjhixon
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    1. Forwards/ Hedging problem calculations 2. Please explain why when the currency value is not managed, the foreign exchange rate mechanism can adjust trade imbalance by itself. While most countries try to manage the value of their currency in pursuit of their own national interests, there seems to be an international trend toward greater exchange rate flexibility. A freely floating currency exchange would institute a system of near-perfect competition incorporating virtually all-international market forces, and help insulate countries from international risks. In a hypothetical “free-floating” currency system, countries would benefit from currency value fluctuations helping to balance their trade with international markets - as currency devaluations make that countries exports cheaper and more attractive to international markets, while inversely making imports more expensive and less desirable. In a purely hypothetical free-float scenario: I want to purchase German bier with US dollars and I find out that the dollar is losing value in relation to the euro. This dollar devaluation makes my favorite German bier more expensive for me to import and consume responsibly in the US (negatively impacting the level of US imports). It would also make US beer companies that compete in those foreign markets more attractive, Yuengling (US) would be cheaper for Germans to import to Germany, as such the American export balance benefits because their products are cheaper relative to the foreign currency and are more attractive to foreign consumers as a result. In such a scenario, the invisible hand of the free market would naturally help ease trade deficits and relatively stabilize current account balances over time , net trade balances would be sustainable and near-zero. The countries would benefit by establishing a true and sustainable Balance of Payments, and also eliminate some of the ‘hot money’ opportunities in the international markets. 3. Explain the benefits and drawbacks of having a strong currency for the United States Having a strong currency relative to trade partners has a positive impact on imports, as consumers react to the lower price points at which the foreign products are offered in the local market. It becomes cheaper for Americans to go on vacations, buy foreign property, buy cheese from France and chocolate from Belgium, cars from Japan, etc. Additionally, US Companies FDI levels would increase, since the dollar has more purchasing power in the foreign markets with which US firms can procure products, services, land, and labor cheaper than before. The rise in imports has a severe negative effect on the trade balance, as US exports struggle to maintain competitiveness with higher prices in foreign markets. In the domestic markets, consumers have changed their consumption patterns - acquired a new taste for imported goods, at the expense of the domestic substitutes. American companies that produce solely for the domestic market are hurt, and American exporters are dramatically impacted by a stronger dollar.

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    1. Forwards/ Hedging problem calculations 2. Please explain why when the currency value is not managed, the foreign exchange rate mechanism can adjust trade imbalance by itself. While most countries try to manage the value of their currency in pursuit of their own national interests, there seems to be an international trend toward greater exchange rate flexibility. A freely floating currency exchange would institute a system of near-perfect competition incorporating virtually all-international market forces, and help insulate countries from international risks. In a hypothetical “free-floating” currency system, countries would benefit from currency value fluctuations helping to balance their trade with international markets - as currency devaluations make that countries exports cheaper and more attractive to international markets, while inversely making imports more expensive and less desirable. In a purely hypothetical free-float scenario: I want to purchase German bier with US dollars and I find out that the dollar is losing value in relation to the euro. This dollar devaluation makes my favorite German bier more expensive for me to import and consume responsibly in the US (negatively impacting the level of US imports). It would also make US beer companies that compete in those foreign markets more attractive, Yuengling (US) would be cheaper for Germans to import to Germany, as such the American export balance benefits because their products are cheaper relative to the foreign currency and are more attractive to foreign consumers as a result. In such a scenario, the invisible hand of the free market would naturally help ease trade deficits and relatively stabilize current account balances over time , net trade balances would be sustainable and near-zero. The countries would benefit by establishing a true and sustainable Balance of Payments, and also eliminate some of the ‘hot money’ opportunities in the international markets. 3. Explain the benefits and drawbacks of having a strong currency for the United States Having a strong currency relative to trade partners has a positive impact on imports, as consumers react to the lower price points at which the foreign products are offered in the local market. It becomes cheaper for Americans to go on vacations, buy foreign property, buy cheese from France and chocolate from Belgium, cars from Japan, etc. Additionally, US Companies FDI levels would increase, since the dollar has more purchasing power in the foreign markets with which US firms can procure products, services, land, and labor cheaper than before. The rise in imports has a severe negative effect on the trade balance, as US exports struggle to maintain competitiveness with higher prices in foreign markets. In the domestic markets, consumers have changed their consumption patterns - acquired a new taste for imported goods, at the expense of the domestic substitutes. American companies that produce solely for the domestic market are hurt, and American exporters are dramatically impacted by a stronger dollar.

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    31 просмотров3 страницы

    Global Business Implications

    Загружено:

    jjhixon
    1. Forwards/ Hedging problem calculations 2. Please explain why when the currency value is not managed, the foreign exchange rate mechanism can adjust trade imbalance by itself. While most countries try to manage the value of their currency in pursuit of their own national interests, there seems to be an international trend toward greater exchange rate flexibility. A freely floating currency exchange would institute a system of near-perfect competition incorporating virtually all-international market forces, and help insulate countries from international risks. In a hypothetical “free-floating” currency system, countries would benefit from currency value fluctuations helping to balance their trade with international markets - as currency devaluations make that countries exports cheaper and more attractive to international markets, while inversely making imports more expensive and less desirable. In a purely hypothetical free-float scenario: I want to purchase German bier with US dollars and I find out that the dollar is losing value in relation to the euro. This dollar devaluation makes my favorite German bier more expensive for me to import and consume responsibly in the US (negatively impacting the level of US imports). It would also make US beer companies that compete in those foreign markets more attractive, Yuengling (US) would be cheaper for Germans to import to Germany, as such the American export balance benefits because their products are cheaper relative to the foreign currency and are more attractive to foreign consumers as a result. In such a scenario, the invisible hand of the free market would naturally help ease trade deficits and relatively stabilize current account balances over time , net trade balances would be sustainable and near-zero. The countries would benefit by establishing a true and sustainable Balance of Payments, and also eliminate some of the ‘hot money’ opportunities in the international markets. 3. Explain the benefits and drawbacks of having a strong currency for the United States Having a strong currency relative to trade partners has a positive impact on imports, as consumers react to the lower price points at which the foreign products are offered in the local market. It becomes cheaper for Americans to go on vacations, buy foreign property, buy cheese from France and chocolate from Belgium, cars from Japan, etc. Additionally, US Companies FDI levels would increase, since the dollar has more purchasing power in the foreign markets with which US firms can procure products, services, land, and labor cheaper than before. The rise in imports has a severe negative effect on the trade balance, as US exports struggle to maintain competitiveness with higher prices in foreign markets. In the domestic markets, consumers have changed their consumption patterns - acquired a new taste for imported goods, at the expense of the domestic substitutes. American companies that produce solely for the domestic market are hurt, and American exporters are dramatically impacted by a stronger dollar.

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    из 3

    Ryan Davine

    Global Business HW #3

    Dr. Tang

    1.

    In this scenario, Porsche should sell the dollars forward at the 60-day rate on July 1st, and hold on
    to the dollars in order to benefit from the more lucrative US interest rate. The strategy will result
    in approx. 899k, and a small increase (.2%) over the option to convert immediately to euros.

    Ryan Davine

    Global Business HW #3

    Dr. Tang

    2. Please explain why when the currency value is not managed, the foreign exchange rate
    mechanism can adjust trade imbalance by itself.
    While most countries try to manage the value of their currency in pursuit of their
    own national interests, there seems to be an international trend toward greater exchange
    rate flexibility.i A freely floating currency exchange would institute a system of nearperfect competition incorporating virtually all-international market forces, and help
    insulate countries from international risks. In a hypothetical free-floating currency
    system, countries would benefit from currency value fluctuations helping to balance their
    trade with international markets - as currency devaluations make that countries exports
    cheaper and more attractive to international markets, while inversely making imports
    more expensive and less desirable.

    In a purely hypothetical free-float scenario: I want to purchase German bier with


    US dollars and I find out that the dollar is losing value in relation to the euro. This
    dollar devaluation makes my favorite German bier more expensive for me to
    import and consume responsibly in the US (negatively impacting the level of US
    imports). It would also make US beer companies that compete in those foreign
    markets more attractive, Yuengling (US) would be cheaper for Germans to import
    to Germany, as such the American export balance benefits because their products
    are cheaper relative to the foreign currency and are more attractive to foreign
    consumers as a result.

    In such a scenario, the invisible hand of the free market would naturally help ease
    trade deficits and relatively stabilize current account balances over timeii, net trade
    balances would be sustainable and near-zero. The countries would benefit by establishing
    a true and sustainable Balance of Payments, and also eliminate some of the hot money
    opportunities in the international markets.

    Ryan Davine

    Global Business HW #3

    Dr. Tang

    3. Explain the benefits and drawbacks of having a strong currency for the United States
    Having a strong currency relative to trade partners has a positive impact on
    imports, as consumers react to the lower price points at which the foreign products are
    offered in the local market. It becomes cheaper for Americans to go on vacations, buy
    foreign property, buy cheese from France and chocolate from Belgium, cars from Japan,
    etc. Additionally, US Companies FDI levels would increase, since the dollar has more
    purchasing power in the foreign markets with which US firms can procure products,
    services, land, and labor cheaper than before.
    The rise in imports has a severe negative effect on the trade balance, as US
    exports struggle to maintain competitiveness with higher prices in foreign markets. In the
    domestic markets, consumers have changed their consumption patterns - acquired a new
    taste for imported goods, at the expense of the domestic substitutes. American companies
    that produce solely for the domestic market are hurt, and American exporters are
    dramatically impacted by a stronger dollar.

    The trend toward greater exchange rate flexibility is likely to continue as deepening cross-border
    linkages increase the exposure of countries with pegged regimes to volatile capital flows because
    flexible regimes offer better protection against external shocks as well as greater monetary policy
    independence..( http://www.imf.org/external/pubs/ft/issues/issues38/ei38.pdf)
    ii

    Although the current account differs from the merchandise trade account by the amount of services
    trade and international factor payments, the two are highly correlated for most countries
    (http://www.wto.org/english/res_e/reser_e/ersd201223_e.pdf)

    http://home.gwu.edu/~jwyang/B102%20Notes%20on%20IMS.pdf
    http://www.economicswebinstitute.org/glossary/exchrate.htm

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