Content ( INTERNATIONAL FINANCIAL)

Part A
1.0 Economic Exposure...........................................................................2
2.0 An MNCs economic exposure can be hedged.................................2
Part B
Balance of payment in the third quarter of 2014......................................5
Balance of payment in the second quarter of 2013..................................7
3.0 Analyse and explain the balance of payment.....................................9
3.1 Current account............................................................................9
3.2 Capital and financial account......................................................10
3.3 Reserves assets.........................................................................10
3.4 Errors and omissions..................................................................10
3.5 Overall balance of payment........................................................10
4.0 Its will harm the future economic performance.................................11
Reference ................................................................................................9

Part A
1.0 Economic Exposure
Economic exposure, refers to the level to which a companys present value of future cash
flows can be generated by exchange rate fluctuations. It also known as operating exposure,
can have a substantial influence on the firms market value, since it is long-term in nature and
has far-reaching effects (Madura & Fox, 2011).

2.0 An MNC's economic exposure can be hedged

A company can assess its economic exposure by deciding the susceptivity of its expenses and
revenues to miscellaneous possible exchange rate, and then the company may restructure
their operations to reduce their economic exposure (Madura & Fox, 2011).
The methods to hedge economic exposure involves: existing foreign markets, production
facilities in foreign markets, dependency on foreign suppliers, the level of debt denominated
in foreign currencies.
1. Marketing Strategies for Managing Operating Exposure
A primary strategic compensation for a company is marketing support and market selling to
commit to Niche market. For instance, companies may deduce from the products unprofitable
and leave the markets in appropriate time, actual exchange rate changes may be the reasons.
The results rely on the constant costs connected with growing market share. The selection of
market state the primary parametric quantity within which a firm can adjust its marketing mix
over time.
They are mainly longer term decisions and medium term decisions. For short term, reactions
of marketing

to exchange rate exposure, the company may have to turn to policy of

promotional and pricing (refer details in table 1).

Table 1: explanation of pricing policy and promotional policies

Source: (Madura & Fox, 2011)

2. Production Strategies for Managing Operating Exposure

The principle production strategies, such as plant location, product mix, product sourcing,
and then companies can use to handle competitive risks (Madura & Fox, 2011).

Plant Location
The major advantage of exposure management is the company have foreign buildings
locations up-rise from the companys competence to move production among the plants in
response to actual exchange rate change. Hence, a company with foreign buildings can
always produce at competence in the location where lower costs, and meet additional demand
from progressively higher costs locations.
Production mix
The major construct is to diversify the production mix such that the effect of exchange rate
changes washes out or tie your expenses more closely to your overseas plays. For instance,
compound the production and exporting of a manufactured good with an importing operation
that imports competitive user goods from foreign producers. It develops a physical handling
hedge that keep amount dollar cash flows constant in light of actual exchange rate
movements.
Diversifying Sources of Inputs
For organization pleasure to stick to their basketwork, the target of a strategy of production
should be to decrease the costs of operating. The most elastic approach to do this in light of
an actual home currency surplus is to buy more components from foreign country. As long as
the inputs are not priced in the market of international integrated, and then the positive should
lower the dollar cost of the inputs. Hence, its will cut down the total costs of production.

3. Financing with foreign funds

To hedge economic exposure, its can be broken down into two groups by the financial
strategies. These companies are assessing and controlling the currency structure of debt, and

the accretion to the contracts of external, its market values are negatively related to the effect
of actual exchange rate change on the value of company (Madura & Fox, 2011).
The primary target of hedging is to try to eliminate exposure. For actual economic exposure
to exchange rates, its can be done by trying to match foreign currency inflows with foreign
currency outflows. It can using the following table 2 as example.

Table 2: Example of foreign currency inflows and outflows

Source: (Madura & Fox, 2011)

Hence, from the exchange rate exposure, foreign currencys debt has decreased the volatility
of cash flow resulting.

Part B
Sources:
State

Administration of Foreign Exchange, 2015

Sources:
State

Administration of Foreign Exchange, 2015

3.0 Analyze and explain the balance of payment

Balance of payments is a reduction of proceedings between home and overseas residents over
a specified period of time. It signals an accounting of a countrys international transactions
for a period (Madura & Fox, 2011). In above, there are the balance of payment in China that
is the third quarter of 2014 and the second quarter of 2013.

3.1 Current account

The current account summarizes the funds flow between all other countries and one specified
country, because of the purchases of trades. As the data shows, the total balance of current
account was 722 in the third quarter of 2014, and was 509 in the second quarter of 2013. It is

a positive number, the positive balance on the current account means the country doing well,
helpful of the country. Its include the goods & services, income, current transfer.
Goods
In the second quarter of 2013, the Exports of goods was 5,467 (credit), and Imports of goods
was 4,567 (debit). It is surplus, because import less than export. In the third quarter of 2014,
the Exports of goods was 6,380 (credit), and Imports of goods was 4,847 (debit). It is surplus,
because import less than export.
Compare with the the second quarter of 2013 and the third quarter of 2014, there were
increased and the goods exporting more, because the items made in China with higher
quality. Other side, as government regulation, currency cannot buy quantity goods from
oversea, so the imports of goods did not change so much.
Services
The balance of service was -623 in the third quarter of 2014, and -277 in the second quarter
of 2013. There is means more imports of services in the 2014. The figure seems was deficit,
because China paying more for service. However, its will gain more profits to China, because
Chinese focus more on the service, it will get more reputation over time, there will be more
foreign friends know about China, and happy to travel to China. There is good for
development the economic of China.
Income
However, let us review the part of Income, there were deficit both in -109 in the third quarter
of 2014, and -92 in the second quarter of 2013. Although the economic of China has a
dramatic growth in the world, as due to many critical reasons, their income still cannot reach
a satisfied result. The factors might be Education, Inland-Coastal Inequality, Urban-Biased
Policies, Demographic Chang (Oxford Inc., 2015)
Current Transfer
Current transfer is means the cash from one account transfer to another account. The figure
was negative in above, because its indicated the received less.

3.2 Capital and financial account

The data of Direct investment abroad was -246 in the third quarter of 2014, and -157 in the
second quarter of 2013. It was negative, because of money flowing out of China much. The
basically causes are economic development and foreign exchange. The Chinese business have
a huge development as the economic growing, the cash increasing in speed, and the foreign
businesses invest China with strong competitive. In the same time, Chinese business
expanding to overseas. The open foreign market is more attractive by Chinese business.
Otherwise, Portfolio investment is different with the direct investment as its no management
control, only to diversity portfolio. The figure was 235 in the third quarter of 2014 which is
higher than 100 in the second quarter of 2013. It is surplus, that is means China has good inturn, and easy for people to buy assets.

3.3 Reserves assets

Reserve assets is a country held liquid assets for international payment and to maintain their
currencies, its negative amount is good that embodies the strength of a country's liquidity.
The reserve assets are major include monetary gold, special drawing rights, reserve position
in the fund, and foreign exchange.
The statistics in the second quarter of the 2013, indicated the total balance of reserves was
negative -466, China is the largest creditor's country in the world, its holding U.S. debt with
numerous, however China's reserves is a negative value. Huge reserves caused RMB
appreciation pressure, also make the space of the domestic monetary policy is becoming more
and more narrow.At the same time, holding huge reserves are also facing huge risk hedging.
As US economy recession, too much reserves will become a trouble. Hence, Chinese
government take an action to hedge its, such as add more Euro and other currency exclude
USD for reserve (Bloomberg.com, 2013).
Therefore, China had maintain their value, and the data appeals 1 in the third quarter of the
2014. It is means China have control on the foreign resevers, as China more stronger, more
exporting, the currency RMB appreciate. It is also means China have Safety, Liquidity, Value
and Profitability in the reserves assets (Miller & Clark, 2015).

3.4 Errors and omissions

Errors and omissions are most important in the balance of payment, because it can indicate
in the inherent risk of the kind of work you do, the number of claims filed in your industry,
the rating category your work is placed in, and the state you live in (Edwards, 2001).
In balance of payments accounting, net errors and omissions register the discrepancies of
statistical, that come out in collection the balance of payments data. A negative credit means
that the sum of the debits is less than sum of the credits (Edwards, 2001).

3.5 Overall balance of payment

China has been unusual in the second quarter of the 2013 in having a surplus on both, the
current account 509 and financial account 286. It explicated the very strong growth of foreign
reserves.
In third quarter of the 2014, the current account was 722 in surplus, financial account was -90
in deficit. It should be able to generate surplus savings, goods, and service in a mature
economy. A residual on the current account would be expected from such a productive
economy, more exports of high tech. Net demand of foreign currency, It will lead to red ink
on the account of financial. Such as China were to invest its surplus savings in overseas.

4.0 Its will harm the future economic performance

If the structure of balance of payment imbalance with the reserves continue to increase, that
will harm the future economic performance. on the contrary, it will bring a huge growth
economic to China. Reviewed the balance of payment in the second quarter of 2013 and the
third quarter of 2014 in China, its shows the current account and capital accounts pulling in
different directions (Taylor, 2012).
(1) The complexity of macro-economic regulation and control was increased by the present
situation imbalances.
In recent years, a large number of foreign currency inflow to China. It was leading the debt of
foreign currency became the main monetary. Although, the central bank was utilized
interchangeably of monetary policy instruments, and innovation the way of regulation and
control for reduce liquidity in the market. However, these policy of regulation and control are
limited, as reserves continued crafty growth. It will directly harm the monetary policy,
Independence and flexibility of macro-control.
(2) Foreign capital liquidity are relative with the invest the fixed assets, more bank loan,
property and the price of stock rising. These liquidity will results Obvious inflationary
pressures and economic bubbles, it will harm the stability of the financial performance.
(3) The trade of balance of payment surplus, it results China has some disputes and frictions
of trade with other countries. Therefore, China is facing mounting international pressure to let
its currency, the RMB, rise in value. It is harm the future economic performance.

Reference
Bloomberg.com, 2013. China Growth Slows to 7.5% as 2013 Target Under Threat.
[online] Available at: http://www.bloomberg.com/news/articles/2013-07-15/chinas-economy-grew-7-5-in-second-quarter-matching-estimates

[Accessed

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2015].
Edwards, 2001. Do I Need Errors and Omissions Insurance?. [online] Available at:
http://www.entrepreneur.com/article/42830 [Accessed 2 May 2015].
Oxford Inc., 2015. Income Inequality in China and its Influencing Factors - Oxford
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[online]

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http://www.oxfordscholarship.com/view/10.1093/acprof:oso/9780199535194.001.
0001/acprof-9780199535194-chapter-2 [Accessed 2 May 2015] .
Madura & Fox, 2011. International financial management. 2nd ed. Australia:
South-Western/Cengage Learning, pp.35-62; pp.417-432.

Miller & Clark, 2015. Where do U.S. dollars go when the United States runs a trade deficit? Dollars & Sense.
[online] Available at: http://www.dollarsandsense.org/archives/2004/0304dollar.html [Accessed 4 May 2015].

State Administration of Foreign Exchange, 2015. Balance of Payments, the

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State Administration of Foreign Exchange, 2015. Balance of Payments, the third
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Taylor, 2012. China's balance of payments: current and capital accounts now pulling in different directions.
[online] Available at: http://www.simontaylorsblog.com/2012/09/18/chinas-balance-of-payments-current-andcapital-accounts-now-pulling-in-different-directions/ [Accessed 2 May 2015].

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