International Financial Management - Coursework Example

International financial management University name Student name Student id Course Date 1. A direct quote can be defined as the foreign exchange that has been quoted concerning the domestic per the foreign currency unit. It entails the process of quoting units that are fixed using foreign currency against the domestic currency. Indirect quote involves foreign markets that do express foreign currency needed in the process of buying or selling domestic currency (Rime, 2003). It involves expressing the foreign currency quantity that is needed in the process of buying domestic currency. An indirect quote is said to have the base as the domestic currency. The indirect quote is the one used in Australia while the United States and Europe use direct quotes. Australia uses the indirect quote as it expresses the foreign currency amount that is required to sell or buy a unit of its domestic currency. It is also referred to as quantity quotation as it is expressed regarding the foreign quantity amount that is required in the process of buying a certain unit of domestic currency (Evans & Lyons, 2008). Australia uses domestic currency as the base currency in the spot currency market while makes use of the foreign currency as the counter currency. 2. One United States dollar is equivalent to around 1.32 Australian dollars. Therefore: 1 US$=UA$1.32 AU$100,000 in US$ can be AU$100,000 divided by 1.32 which is equivalent to US$75757.58. Supposing the quote is US$0.736 in Australia, the cost of AU$100,000 in US$ would then be: US$75757.58 multiplied by US$0.736 = US$55757.576 3. 1 British Pound is equivalent to US$1.31. (1 British Pound = US$1.31) Therefore, $15,000 is equivalent to ($15,000 divided by 1.31) = 11450.38 British pounds. Converting the 11450.38 British pounds back to $US 11450.38 British pounds multiply by 1.31= $US15, 000 If the British pound is quoted at US$1.523 the value in US$ will be: US$15, 000 multiply by US$1.523 = US$22,845 The US$ needed to earn $1,500 $1,500 divided by 0.31= $4838.7 Therefore, if I were in a position to buy at bid rate pounds and sell them at ask rate to earn $1,500 I will then supposed to have around $4838.7. 4. Foreign exchange market Foreign exchange market is said to provide an institutional and physical structure where the currency of one nation is exchanged for another currency of a different country. The exchange rate is normally determined by the physical completed foreign currencies. Foreign change transaction is taken to represent the agreement resulting between the seller and the buyer in the money market. Specified amounts of currencies are delivered with the rate specified for the various currencies that are involved in the transaction (Bjønnes & Rime, 2005). The market of the foreign exchange does span in different regions globally where the prices and currencies are traded daily. The market is considered to be one of the most liquid markets have many transactions solving exchange of different foreign currencies do take place. Functions of the foreign exchange market The foreign exchange market enables a company to transfer the purchasing power from nation to the other. The countries transferring the purchasing power do provide or obtain credit for trade transactions at the international level while minimizing the foreign exchange risks exposure. Transferring purchasing power Transferring purchasing power is considered necessary as global transactions do involve parties that have various foreign currencies. The players in the foreign exchange market are countries that have different foreign currencies that are then traded in the market at different rates (Evans & Lyons, 2008). Each party in the foreign exchange market does deal with its currency where the transactions are normally invoiced using one currency, Providing credit Foreign exchange market does assist in providing credit as the movement of the goods that take place between states do take time where the inventories that are in transit need to be financed. Minimizing risks associated with the foreign exchange The Foreign market is said to provide the necessary hedging facilities that are needed in the process of transferring the risks related to the exchange market to some else. The market participants Foreign exchange market is said to consist of two tiers that include wholesale or interbank market and the retail or client market. The individual transactions concerning interbank market do entail large amounts of money involving multiple millions of USD or even equivalent value associated with other currencies (Bjønnes & Rime, 2005). In the other hand, the contracts that take place between the bank and the customers normally have a specific amount that is sometimes considered down to the last penny. The dealers in the Foreign exchange Banks and non-bank dealers in the foreign exchange market do operate in both the clients and interbank markets. The profit they realize is said to be through buying exchange foreign currencies at bid price where they resell the currencies at ask prices that are normally slightly higher. The competition taking place globally among the market dealers has led to narrowing the spread taking place between the ask and the bid hence contributing in the process of making the operations of the foreign exchange market more efficient just like in the security market (Evans & Lyons, 2008). The dealers in the department of the foreign exchange especially the big international banks do function as if they are the makers of the market. They are said to be willing to sell and buy the currencies that they specialize through ensuring that they maintain a certain position in the currencies. The participants in investment and commercial transactions International portfolio investors, exporters, and importers, tourists, multinational companies among other foreign exchange market are said to facilitate the execution process of the investment or commercial transactions (Hartmann, 2008). These participants in the market a said to make use of the foreign exchange market in the process of hedging the risks associated with foreign exchange. Arbitragers and speculators The arbitragers and the speculators are said to seek profits through trading in the foreign exchange market. They do operate in their interests where they do not need to serve the customers or make sure that there is a continuous market (Melvin & Melvin, 2003). The speculators are said to seek their profits from the changes in the exchange rates. On the other hand, the arbitragers do try to obtain profits through the differing simultaneous exchange rates in various markets. Treasuries and central banks Treasuries and the central banks are said to make use of the markets in the process of spending and acquiring reserves of the foreign exchange of the country and influence the prices traded in their currencies. They are said to do best especially when willing to ensure that they take the loss of the transactions of the foreign exchange (Rime, 2003). The treasuries and central banks are said to differ in behavior and motive concerning the different market participants. Foreign exchange brokers These are agents responsible for facilitating a trade that takes place between dealers without necessary becoming the transaction principals. The brokers do charge some commission and ensure access to many dealers globally using open telephone lines. The business of brokers entails knowing the dealers who are ready and willing to sell or buy the foreign currencies (Evans & Lyons, 2008). The knowledge assists the brokers in looking for a counterpart for customers quickly without the need to reveal the identity of the other party until an agreement is made. Transactions taking place in interbank market The transactions taking place in the foreign market can be executed either on the spot, swap or forward basis. Spot transactions These transactions do require the foreign exchange to be delivered immediately. In interbank markets, the spot transactions are said to involve buying the exchange foreign currencies while making payment and delivery among banks that do take place especially on the second business day (Hartmann, 2008). Spot transactions are said to account for approximately 43% of the transactions done in the foreign exchange market. Outright forward transactions These transactions do require the delivery to be made at a certain future value date where the amounts of the currencies are specified. The exchange rate is said to be established at the agreement time and prevails where the delivery and the payment do wait until the maturity time (Bjønnes & Rime, 2005. The outright forward transactions do account for around 9% of the transactions taking place in the foreign exchange market. Swap transactions These transactions are said to entail simultaneous buying and selling of a certain amount of exchange using various value dates. For instance, a dealer can buy currencies and simultaneously sells the bought currencies are traded back in the forward market. An agreement is executed in the form of single transaction where the dealer is said to incur o any unexpected risks associated the foreign exchange (Rime, 2003). Swap transactions are said to account for approximately 48% of the transactions taking place in the foreign market. 5. Strategic moves There are strategic motives that make companies multinational. Some of the strategic moves can include achieving efficiency, market expansion and increase networks. Market expansion Companies can be motivated to venture into the international markets to access new market for its products. Management of a company can realize the need for coming up with strategies of venturing into the international markets. For example, many organizations do expand their operations aiming at accessing larger markets where they venture into the foreign markets (Buckley, 2009). The primary motive of expanding the market is to ensure that the profits are increased through increased sales volume. Organizations might be motivated to expand their market aiming at conducting investments in new markets or even exploit and promote new markets. Management of a company might be motivated to enter the new markets due to the expected growth of the market or objectives of the organization to increase the customer base by delivering the products into the new markets (Chen, et al. 2004). Achieving efficiency and spreading risk Organizations can be motivated to enter into the foreign market to achieve efficiency in operations and spread risks. The efficiencies in operations can be realized by reducing the costs of production through economies of scale can be realized by producing goods in large scale. For instance, organizations can achieve economies of scale by producing goods in large scale hence being efficient as the costs of production are reduced (Chen, et al. 2004). This is because the company can be in a position to utilize the human resources in the organization in a better way hence realizing efficiencies. Besides, an organization can be motivated to venture into the international markets as a strategy of spreading risks. For instance, a company can have operations in different countries aim at ensuring that the risks associated with financial risks are diversified (Yophy, 2004). This is because when on country is faced with the crisis the company can optimize the operations in the country that is not faced by the crisis. Increase networks. Networking among other large organizations in the global market has also been a motive that has been forcing organizations to venture into the international markets. For example, companies can decide to enter international markets to access new technologies that can only be achieved through networking with organizations that have such technologies. An organization can participate in the formation of alliances and other social connections with the large corporations. For instance, the network relations can entail contractual cooperation, supplier-customer relations and other personal connections with the various stakeholders (Buckley, 2009). These networking relations are said to assist in the process of achieving the organizational goals where the operations of the company can be made effective and efficient through establishing good relations with the stakeholders. 6. Theory of purchasing power parity Purchasing power parity is defined as the theory that provides the exchange rates that exist between the currencies that have equilibrium the moment purchasing power is equal in two states. The theory assists in estimating the exchange rate that does exist between currencies of two countries (Rime, 2003). Also, the purchasing power parity can be crucial in minimizing the international comparisons that might be misleading. Absolute purchasing power parity and relative purchasing power parity Relative purchasing power parity entails the economic theory that is useful in making predictions concerning the relationship existing between inflation rates of two different states. The economic theory entails making predictions over a period that is specified where the movement in the exchange rates over a period of the countries can be identified (Hartmann, 2008). On the other hand, absolute purchasing power parity entails obtaining the exchange rates of the two nations that have identical price level ratios of the two countries. This concept is based on the one price law where the real prices of goods are expected to be the same across countries. References Bjønnes, G. H., & Rime, D. (2005). Dealer behavior and trading systems in foreign exchange markets. Journal of Financial Economics, 75(3), 571-605. Buckley, Peter J. (2009). Foreign Direct Investment by Small and Medium Sized Enterprises: The Theoretical Background. Small Business Economics, vol. 1:2, pp. 89-100. Chen, Tain-Jy, Chen, Homin & Ku, Ying-Hua (2004). Foreign direct investments and local linkages. Journal of International Business Studies, vol. 35: 4, pp. 320-333. Evans, M. D., & Lyons, R. K. (2008). How is macro news transmitted to exchange rates?. Journal of Financial Economics, 88(1), 26-50. Hartmann, P. (2008). Currency competition and foreign exchange markets: the dollar, the yen and the euro. Cambridge University Press. Melvin, M., & Melvin, B. P. (2003). The global transmission of volatility in the foreign exchange market. Review of Economics and Statistics, 85(3), 670-679. Rime, D. (2003). New electronic trading systems in foreign exchange markets. New Economy Handbook, 469504. Yophy (2004). The Establishment of Global Marketing Strategic Alliances by Small and Medium Enterprises. Small Business Economics, vol. 22, pp. 365–377. Read More