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Global Financing

Prepare a 800-1,000-word paper in which you analyze one of the following global financing and exchange rate topics:

1) Purchasing Power Parity/"Big Mac Index"

Select a particular country, and a particular industry, Describe Purchasing Power Parity/"Big Mac Index", how it is used in global financing operations, and its importance in managing risks. Show how this tool or method applies to doing business in your selected country.

Use and properly cite (APA) at least three sources.

http://www.wisegeek.com/what-is-purchasing-power-parity.htm

http://www.amazines.com/Purchasing_power_parity_Big_Mac_Index_related.html

Solution Preview

Prepare a 800-1,000-word paper in which you analyze one of the following global financing and exchange rate topics:

1) Purchasing Power Parity/"Big Mac Index"

Select a particular country, and a particular industry, Describe Purchasing Power Parity/"Big Mac Index", how it is used in global financing operations, and its importance in managing risks. Show how this tool or method applies to doing business in your selected country.
The country selected is China and the industry is lightweight spring weighing machines. An American investor is planning to set up a lightweight spring weighing machine facility in China.
Purchasing Power Parity is a theory that says that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This implies an equality in the ratio of the two countries' price level of a fixed basket of goods and services, and the exchange rate between the two countries (Officer, L 1982). In other words purchasing power parity equates the long term equilibrium exchange rate of two currencies to their purchasing power. This only happens in efficient markets. The value of the Purchasing Power Parity theory is that it takes into account the cost of living and the inflation rates. However in the short run the Purchasing Power Parity does not determine the exchange rates. In the short run, the exchange rate is affected by interest rate changes, perceptions of growth and news relating to the two countries. The Purchasing Power Parity is established in the long run. Some economists have taken time periods of between 4 to 10 years for equalizing the purchasing power parity (Madura, J 2006).
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Solution Summary

Global Financing is discussed very comprehensively in this explanation..

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