Forum Responses
I need a 125 word reply to each of the four following forum postings in a finance class (500 words total) You are responding to comments made by other students in the class. MUST BE ORIGINAL!
Forum 1
When an organization decides to engage in international financing activities, they also take on additional risk as well as opportunities. The main risks that are associated with businesses engaging in international finance include foreign exchange risk and political risk. These risks may sometimes make it difficult to maintain constant and reliable revenue. When an organization decides to engage in international financing activities, they also take on additional risk as well as opportunities. The main risks that are associated with businesses engaging in international finance include foreign exchange risk and political risk. These risks may sometimes make it difficult to maintain constant and reliable revenue. Foreign exchange risk occurs when the value of investment fluctuates due to changes in a currency's exchange rate. When a domestic currency appreciates against a foreign currency, profit or returns earned in the foreign country will decrease after being exchanged back to the domestic currency. Political risk transpires when a country's government unexpectedly changes its policies, which now negatively affect the foreign company. These policy changes can include such things as trade barriers, which serve to limit or prevent international trade. "Since 2010, one in ten of the countries surveyed have experienced a significant increase in the level of short-term political risk. These risks include governments asserting control over natural resources, regimes being ousted by popular uprisings and the expropriation of foreign investors' assets" (Brown, Sophle. 2013).
References
Brown, Sophle. Political instability on the rise. Dec 11, 2013. Retrieved from web: https://www.cnn.com/2013/12/11/business/maplecroft-political-risk/
Forum 2
Multinational companies seem to be the standard for future business. They are typically more productive and pay their workers more than comparable locally owned businesses (Eun & Renick, 2015). With the many advantages that are available to multinationals it is no surprise that companies are shifting in this direction. However, all of the advantages do not come risk free as you may have expected. Two of the significant risks associated with multinationals and international financial management are foreign exchange risk and political risks.
Foreign exchange risk is what would likely be the first thing you would consider when thinking about international finance. Exchange rates fluctuate on a regular basis and can be somewhat unpredictable at times. This has been the case since the early 1970s when fixed exchange rates were abandoned (Eun & Renick, 2015). Exchange risk is the difference between the exchange rate at the moment a business deal is closed for a given amount and the exchange rate at the moment when payment is made (Griffin, 2016). Exchange rates can be affected by a number of things and must always be considered when making international finance decisions.
Political risks are another major factor in determining the value of international financial management opportunities. Political risks arise from a sovereign nation's ability to change the "rules of the game" sometimes leaving the affected parties without effective recourse (Eun & Renick, 2015). These risks can vary from minor, such as small tax changes, to major, such as the government freezing international money transfers making it impossible to convert local currency into that another country (Griffin, 2016). These risks exist at the micro and macro levels and can be classified as transfer, operational or control risk (2015). With all that taken into consideration while their are many opportunities for multinationals, it is clear that making a smart decision is much more complicated than in domestic business.
Reference
Eun, C., & Renick, B. (2015). International Financial Management, Seventh Edition. New York, NY:McGraw-Hill Education.
Griffin, D. (2016, July 10). What Are Some of the Most Significant Financial Risks of Conducting Business Internationally?. Houston Chronicle
Forum 3
International monetary systems are sets of internationally agreed rules, conventions and supporting institutions, that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. A good international monetary system should provide adequate liquidity to the world economy, smooth adjustments mechanism, and safeguard against the crisis of confidence in the system. "Instead of establishing a sound money foundation that would permit free-market mechanisms to optimize capital flows and maximize long-term economic growth, we have empowered central banks to engage in central planning" (Shelton, Judy. 2015).
Provision takes the form of adequate units of official reserves held by governments of countries involved in foreign trade. It also requires incentives for commercial banks operating as foreign exchange dealers to hold sufficient foreign exchange reserves to satisfy the requirements of the private sector. Smooth adjustment mechanism requires that individual nations carry out economic and financial policies conducive to maintaining reasonable well balanced international payment systems, or that financial mechanisms operate to provide payments adjustment, or that governments act to preserve equilibrium in the foreign exchange markets.
References
Shelton, Judy. Spring-Summer 2015, v. 35, iss. 2, pp. 273-89. Fix What Broke: Building an Orderly and Ethical International Monetary System. Retrieved from Ashford Library: https://eds.a.ebscohost.com.proxy-library.ashford.edu/eds/detail/detail?vid=4&sid=4ee49db0-c312-44fc-8bc4-767af7acaf4d%40sessionmgr4001&hid=4213&bdata=JnNpdGU9ZWRzLWxpdmU%3d#db=eoh&AN=1518744
Forum 4
Well I would like to begin by pointing out that the criteria for a "good" international monetary system is not a matter of fact but more a matter of opinion and those opinions vary greatly among economists. I apologize in advance because, while I will try and keep this short, it may become somewhat of a crusade as this is a topic I feel passionately about.
In my opinion it is a mistake to implement a system of fiat money. So the primary, and truly only, criteria necessary for a good international monetary system is that the money be backed by a good which is easily exchangeable. Precious metals were very effective until the interwar period when governments intervened in order to fund the war efforts(Eun & Renick, 2015). You see the amount of money the government had was simply not enough to keep up with the expenses of war. The only way to fund the war would have been through unbearably higher taxes. So the government made it illegal to own gold, forced all citizens to sell their gold and then created the fiat money system that we use today. This gave the government to print as much money as needed which meant that the value of the dollar was inflated. This essentially worked as a tax that was invisible.
I will resist the urge to go into a full on rant about how much of a genius Milton Friedman is and how awful the Federal Reserve is but I would recommend that anyone who is interested in learning a bit more about the changes in our monetary system since the creation of income tax and the Federal Reserve might consider watching this video. https://www.facebook.com/thefreethoughtprojectcom/videos/1754839838069609/ It is about 7 minutes long (sorry btw it is a cartoon) and while everyone may not agree with it I have done a considerable amount of research into the topic and I can say that it is pretty accurate and a great way to provide a brief introduction into a very important topic. It does include some things in the beginning about Britain which don't directly apply but are interesting.
So back on topic, I believe it is essential that any monetary system be backed by a commodity such as gold or silver. When it is backed simply by the government who issues it that government has complete control of its value and can manipulate it in ways that are a disadvantage to its citizens. An elastic currency is fantastic in theory but the maturity and responsibility required to make it effective is not something that we can trust any group of people to control, not even our own government and especially not the Federal Reserve which practically no one realizes is not a part of the government, sorry Keynes. If a monetary system is backed by something like the gold standard inflation is controlled by the market which is much more dependable than a group of politicians and private banks. This provides stability to the money and limits the potential for manipulation and crooked financial practices.
Reference
Eun, C., & Renick, B. (2015). International Financial Management, Seventh Edition. New York, NY:McGraw-Hill Education.