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Controlling Currency with Central Banks

You have been tasked to brief the finance team on an aspect of international finance and then to lead a discussion with the firm's finance team.

The briefing is needed to provide more foundation for the finance team because they are not well versed in the international aspects of finance. Provide a briefing describing when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates.

Next, discuss and advise if the firm should reinvest its profits in a country where they are generated rather than repatriate them to the United States because of tax implications. Consider if the exchange rate is a bigger concern.

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The briefing is needed to provide more foundation for the finance team because they are not well versed in the international aspects of finance. Provide a briefing describing when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates.

Foreign exchange refers to money denominated in the currency of another country. The exchange rate is a price-the number of units of one nation's currency that must be surrendered in order to acquire one unit of another nation's currency. In the spot market, there is an exchange rate for every other national currency The Forex market is essentially governed by the law of supply and demand and is generally not regulated by any government or coalition of governments. This is true in the U.S., where participation in the Forex market is not regulated. The prices set for each country's money is determined by the desire of those trading to acquire more of it or to hold less of it. Each individual acts on the belief that he or she will benefit from the transaction.
It is the interaction of demand and supply of foreign exchange that results in the movement of currency prices in the Forex market.
(Wikipedia)
A central bank can only operate a truly independent monetary policy when the exchange rate is floating. If the exchange rate is pegged or managed in any way, the central bank will have to purchase or sell foreign exchange. These transactions in foreign exchange will have an effect on base money analogous to open market purchases and sales of government debt; if the central bank buys foreign exchange, base money increases, and vice versa.

Accordingly, the management of the exchange rate will ...

Solution Summary

Over 1000 words describe why central banks use their own or other nations' currencies and how a firm should reinvest their profits to avoid US tax implications.

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