International Financial Markets Issues - Assignment Example

Name: PART C (i) There are many factors that can lead to appreciation or depreciation of country’s currency against the USD. Exchange rates are often unpredictable in the world of business as found out by Moschella, M. (2015). There are major indicators that lead to a change of these exchange rates. Appreciation or depreciation of the currency of any country against the USD can be used as an indicator for determination of the economic health of the country. For instance, due to the economic instability in Argentina within the last period of three years the Argentine Peso has depreciated against the USD by 32.1654%. The following factors affect the currency of any state against the USD. First are the Gross Domestic Product (GDP) and the Economic Growth of a country. According to Habib, M. M., & Stracca, L. (2012) The GDP gives the total market value of any goods and services offered by any nation. Due to this fact, the GDP is widely used to measure the economic health and growth of any country (Levy-Yeyati, E et al. 2013). A good example is in the year 2011 whereby the real GDP of United States appreciated from a value of 15,052 to 15,679 billion dollars promoting the USD to appreciate against almost all the currencies during that fiscal period. The second factor is the interest rates of a given country. Interest rates are very essential since they affect the fluctuation of the exchange rates of any given country. Central banks or respective countries are obliged with the responsibility of controlling the interest rates of the country to secure the economic health of the country as posited by Levy-Yeyati, E et al. (2013). When the interest rates are considerably high, then potential investors are likely to receive high returns thus attracting many investors. This in turn attracts foreign capital thus leading to the appreciation of the currency of the country. Considering the other hand, when interest rates are considerably low, the currency of a given country depreciates. This implies that the currency becomes less favourable to save money for investors. This scares away investors as claimed by Béreau, S. et al. (2013). The demand for the currency declines and spending, on the other hand, increases sharply. The other implication of low-interest rates is borrowing that leads to inflation. Thirdly, public debt also affects the appreciation or depreciation of a given currency against the USD (Doluca, H., 2014). Governments usually do large-scale borrowing to facilitate in funding projects for their countries. This facilitates the economic growth since it creates more employment opportunities. However, if the debt is large with a large deficit, there can be undesirable consequences. This may in turn push away potential investors. A good example is the debt crisis in Greece. This has led to undesirable consequences on the economy of Greece. The debt crisis has been estimated to be above 15.6% of the GDP, which is leading in the European Union nations (Richards, P. D. et al. 2015). Finally, political and economic stability also affect appreciation or depreciation. This affects the currency value for any given country. Political activities such as political turmoil lead to political instability that lowers investors’ confidence. Consider an example of South Africa. Since the start of the Xenophobic fights in the country around 67% of the private businesses in the country have withholder decisions as a result of political instability created by the fights in the country. This has in turn led to the depreciation of approximately -30%. PART C (II) Based on my analysis on the currency of Argentina, the Argentine Peso, I expect the currency to appreciate by almost 14%. From my analysis, it is very apparent that the inflation rate of the country is around 63%. The Argentina’s economy is much different than most of the emerging different from the information provided in the Moodle. From the information regarding Argentina’s GDP growth value, the country is portraying a lacklustre growth of their economy. The devaluation of its currency is severe. However, there are various reasons why I predict that Argentine Peso will appreciate in the future. First, is the country’s foreign exchange policy? The adoption of the crawling-peg by the central bank of the country so as to control the Peso’s value is subject to economic growth of the country which will lead to an appreciation of the currency. This policy controls instances such as daily transactions and decay-like devaluation that may result to slow economic growth. Since the Central Bank of Argentina (BCRA) manages its reserves directly, it absorbs fluctuations that can occur seasonally for the cash flows generated in the country. This methodology ensures timely debt repayment. However, it prevents the Argentine Peso from leaving the country thus may cause depreciation of the currency in some instances. The second reason I think the Argentine Peso will appreciate against the USD with time is their policy on the balance of trade and trading partner make up for the country. The there trading policy has enforced strict measures that may lead to a sharp increase of value of their currency. These trading policies have been enforced in such a way that any loss of the purchasing power of the country will put a considerable less cost pressure towards businesses and the citizens. Their trading policies have also encouraged more imports of around 20% to the U.S compared to the export of around 12% to the same country making a good inflow of the USD currency to the country. Thirdly, I think the Argentine Peso will appreciate against the USD because of the country’s economic outlook. The country has employed economic tactics whereby it is using inflation so as to fuel the internal markets instead of using debt for industrial development. This can be termed as the relative Keynesian approach. However, this methodology needs a country to balance its exports to ensure more flexibility and efficiency so as to maintain the economy at afloat. This approach will make Argentina rebuild its economy from the initial collapse where it has a currency depreciation of around 60% against the USD. The government have also discounted the energy prices thus fuelling the industries of the country. In conclusion, from my analysis and research pertaining the Argentine Peso, it is very clear that the Central Bank of Argentina is playing a key role in appreciating the currency against the USD as also claimed by Datta, K. (2014). However, the currency is devaluing lately the Argentina’s closed and controlled financial system is reducing any possible risk as a result of the depreciation as claimed by Maya, L. et al. (2015). PART D (I) There are various implications that may come as a result of increased exchange rate of the Argentine Peso against the USD for my company in the United States. When the Argentine Peso appreciates the USD will weaken, and there will be some implications for a case where one owns a company in the United States. First, I will increase the prices of my products or services for the domestic consumers in the US for raw materials I import from Argentina. A business in the U.S will be hurt by the decrease in value of the USD and an increase of value of the Argentine peso. A depreciated dollar on the value of Peso will mean investors from U.S pay more for imported products from Argentina as also claimed by Narayan, P. K. et al. (2015). The second implication for this will be more problems will develop for companies in the U.S that ship their raw materials to Argentina for the production of finished goods especially the companies who ship back the products to the U.S. The third implication will be large companies in the U.S benefitting from the reduced value of the dollar to peso. Large companies exporting products and services to Argentina will earn super profits in the case whereby they are exporting to Argentina. Finally, a depreciated value of the dollar against the peso will have a positive implication towards the GDP (Maya, L. et al. 2015). The international trade that represents a significant percentage of the GDP will benefit from this. According to stats from the Institute for International Economics in the year 2002, an estimation of around 10% of a decline in the USD value meant a realised increase of 5% of the GDP of the country as also found out by Frieden, J. A. (2014). This will mean more opportunities to invest in the U.S. the other advantage of currency appreciation to a business in the U.S is the investment is less likely to be risky. This will in turn bring more returns for the company. The other adverse effect of the appreciation of the Argentine Peso against the USD will be low imported quantities of raw materials. Executives of companies in the U.S will find it expensive to import raw materials that can be sold to the domestic market. The companies will opt to import only a few percentages of the raw materials from Argentina then sell to the same country to minimize the effect of the depreciation of the USD to Peso. PART D (II) There are various advantageous and adverse effects for appreciating Argentine peso on the cash flows of a company. First, imports for raw materials will significantly become expensive, and thus my company in the U.S will produce more products thus increasing the rate of cash flows. The number of domestic consumers will increase since importing goods will be expensive. This will be advantageous to my company since local consumers will opt to buy my company’s products as explained by Keefe, H. G. et al. (2015). However, there will be adverse effects in the case where I import lots of raw materials and components from Argentina. Imports from Argentina will be typically expensive thus may lead to little profit margin for my company located in the U.S due to fewer cash flows. Secondly, increased value of the Argentine peso towards the USD will mean that I will spend more for foreign goods from Argentina. According to Ma, G., & McCauley, R. N. (2011)This in turn will affect the cash flows in that it will prompt me to increase the prices for my company’s products so that I remain competitive in the market. This strategy, however, is somehow risky, can earn a handsome company profits without much efforts on production. However, there are possible solutions so as to mitigate the risk posed by the rise of the value of the Argentine Peso against the USD. The first solution that I can use to mitigate any possible risk against my company can be looking for high-interest rates (Doluca, H., 2014). I will opt to buy currencies of countries with the relative higher interest rate. This strategy has been used mostly in Australia whereby holding cash in the country’s bank can generate almost 4% annually as found out by Pontines, V., & Siregar, R. Y. (2012). The other strategy that can be used is buying stocks and currencies that are undervalued. The first procedure in this involves analysing a country’s current account deficit as explained by Mihov, I. (2013). A small deficit means a currency may be undervalued which may favour companies in the U.S according to Eichengreen, B., & Tong, H. (2015). This is nowadays possible since potential investors are lately globally oriented making them have high exposure to overseas countries than ever before. Appreciation of peso against will also be advantageous in that it will correct balance of payments deficits. Exchange rates will appreciate which will mean the balance of deficits are paid (Pontines, V., & Siregar, R. Y., 2012). This in turn ensures the restoration of the competitiveness involving the exports and thus more cash flows are expected. The other adverse effect associated with the appreciation of Peso towards USD will be instability of prices of products and services in the US as found out by Doluca, H. (2014). Appreciation of Peso against the USD will mean that prices will largely fluctuate especially for products whose raw materials are imported from Argentina as explained by Richards, P. D et al. (2015). This will cause uncertainty for my company in the U.S, and my investment will be adversely affected. In conclusion, in the current world of business, the appreciation or depreciation of a currency and the varying currency rates affect the long-term interests of many countries (Mihov, I., 2013). The value of a given currency and rates affect majorly the economic health of any country. REFERENCES Béreau, S., Villavicencio, A. L., & Mignon, V. (2012). Currency misalignments and growth: a new look using nonlinear panel data methods. Applied Economics, 44(27), 3503-3511. Couharde, C., & Sallenave, A. (2013). How do currency misalignments’ threshold affect economic growth?. Journal of Macroeconomics, 36, 106-120. Datta, K. (2014). Relationship between Currency Depreciation and Trade Balance in India-An Econometric Study. Journal of Finance and Economics, 2(3), 83-89. Doluca, H. (2014). Examining Sovereign Bonds Nominated in Euro and US-Dollar During the Euro-Crisis: Appreciation or Depreciation of the New Local Currencies Introduced Subsequent to Euro-Breakup?. Available at SSRN 2521450. 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