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    NAFTA and international finances

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    1. What is the logic of managing transaction exposure?
    2. Will a rise in the national standard of living worsen or improve the country's environmental conditions?
    3. Has NAFTA been a success? Explain
    4. Which are the main pitfalls of investing in transition economies?

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    NAFTA and international finances

    1. What is the logic of managing transaction exposure?
    Transaction exposure
    It is the extent to which given exchanges rate change will change the value of foreign currency denominated transactions already entered into.
    Logic of Managing Transaction Exposure :

    * Transaction exposure measures gains or losses that arise from the settlement of existing financial obligations, namely:
    o Purchasing or selling on credit goods or services when prices are stated in foreign currencies
    o Borrowing or lending funds when repayment is to be made in a foreign currency
    o Being a party to an unperformed forward contract and
    o Otherwise acquiring assets or incurring liabilities denominated in foreign currencies
    http://www.businessfaculty.utoledo.edu/pkozlowski/FINA3500/ch08.ppt.

    It needs to be managed as this will exposure arises whenever a company is committed to a foreign-currency-denominated transaction. Since the transaction will result in a future foreign currency cash inflow or outflow, any change in the exchange rate between the time the transaction is entered into and the time it is settled in cash will lead to a change in the dollar (Home Currency) amount of the cash inflow or outflow.

    Transaction exposure is a subset of economic exposure. It is because the currency fluctuations affect more than currency transactions. For example an increase in inflation in USA may:
    1. Lower value of outflow from US (transaction exposure)
    2. Increase subsidiary's US sale
    3. Raise financing cost in US
    (Demasky, Global Finance)

    Conclusion

    Exchange rate exposure may affect financing costs volatile cash flow from exchange rate changes increases risk. Transaction exposure reflects the exposure of an MNC's future cash transactions to exchange rate movements

    REFERENCE:
    MACRO ECONOMICS: BY MISHRA & PURI
    WWW.REDIFF.COM
    Demasky, Global finance.
    www.stetson.edu/~jmallett/fin503/ppt/Ifmch10S2002.ppt

    2. Will a rise in the national standard of living worsen or improve the country's environmental conditions?
    Rise in national standard of living has got certain positive impact on the environmental standards. It has helped in not only raising environmental standards by removing wastages and improving efficiency. Improved standard of living and living conditions have ...

    Solution Summary

    This solution answers 4 questions on international finance, addressing the logic of transaction exposure, national standard of living, NAFTA and investing in transition economies.

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