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    Responses to foreign exchange rate questions

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    Respond to the following statements.
    1. Foreign exchange rates are used to establish budgets and track actual performance. Of the various exchange rate combinations, spot, forward etc. which do you favor and why? Is your view the same when you add local inflation to the budgeting process?
    The process that I like the most is forward foreign exchange market where it involves contracting today for the future purchase or sale of foreign exchange. I do believe that it's quite risky since you are speculating so much on the future in hopes that you can turn a profit down the line. You can either loose quite a bit of money or make quite a bit of money with this scenario. This type of exchange rate mechanism doesn't involve too much inflation as you are hedging against a certain type of currency and whether you can buy low and sell high otherwise you will have guessed wrong and lost money. Inflation though is always a currency for government budgets, commercial budgets, or even personal budgets to ensure that they can still spend the same amount of money for the same amount of goods. There are certainly many other options available as far exchange rate mechanisms are concerned. It just needs to fit what is best for your company, government, or your personal investment to ensure that it fits your end goals.
    2. Foreign exchange rates are used to establish budgets and track actual performance. Of the various exchange rate combinations, spot, forward etc. which do you favor and why? Is your view the same when you add local inflation to the budgeting process?

    Foreign exchange rates are used for budgets and tracking actual performance, although these variables are interrelated higher inflation in a specific country tends to drive the value of the currency down which impacts the exchange rate-changers in currency exchange rats have the most effect on the budgeting process. Changes in these two external factors emerge from several sources including economic conditions, government policies, monetary systems and potential risks. Other external forces such as political turmoil, competition labor quality, and cultural or religious orientation of the local populace exist, but they tend to be related specifically to one country or the world. Movements in foreign exchange rates are explained by different theories but are based on the underlying demand for assets denominated in a particular currency. Foreign exchange rate fluctuations affect a multinational through translation exposure, transaction exposure, and economic exposure. Each of these exposures has a different effect on the entire budgeting process.
    3. Should foreign companies seeking to issue securities in the United States be required to disclose as much as U.S. companies issuing securities in the United States?
    I believe that foreign countries seeking to issue securities in the United States should be subject to disclose the same information as U.S. companies that issue securities within the United States. If we are holding United States companies accountable for disclosing important information and staying transparent, then there is no reason we should not be asking the same of any countries outside the United States. Companies in other countries that decide to issue securities in the United States actually see benefits because people are more willing to invest in a company that is willing to disclose financial information and stay transparent.

    4. Should foreign companies seeking to issue securities in the United States be required to disclose as much as U.S. companies issuing securities in the United States?
    Foreign firms with weak governance mechanisms can opt to outsource a superior corporate governance available here in the United States, for example the Italian automobile FIAT announces its decision to list its stock on the New York Stock Exchange, since shareholder level protection afforded by the U.S. Securities and Exchange Commission and the NYSE is much higher than that provided in Italy, the action will be interpreted and signaling the company's commitment to shareholder rights. Investors in Italy and abroad will be more willing to provide capital to the company and value the company shares. The beneficial letters from U.S. listings will be greater for firms form countries with weaker governance mechanisms.
    The SEC is responsible for protecting U.S. investors from potential loss of income by maintaining fair and orderly practices to encourage capital markets, the commission requires businesses to disclose meaningful information about securities.

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    Solution Preview

    1. Foreign exchange rates are used to establish budgets and track actual performance. Of the various exchange rate combinations, spot, forward etc. which do you favor and why? Is your view the same when you add local inflation to the budgeting process?
    The process that I like the most is forward foreign exchange market where it involves contracting today for the future purchase or sale of foreign exchange. I do believe that it's quite risky since you are speculating so much on the future in hopes that you can turn a profit down the line. You can either loose quite a bit of money or make quite a bit of money with this scenario. This type of exchange rate mechanism doesn't involve too much inflation as you are hedging against a certain type of currency and whether you can buy low and sell high otherwise you will have guessed wrong and lost money. Inflation though is always a currency for government budgets, commercial budgets, or even personal budgets to ensure that they can still spend the same amount of money for the same amount of goods. There are certainly many other options available as far exchange rate mechanisms are concerned. It just needs to fit what is best for your company, government, or your personal investment to ensure that it fits your end goals.

    The student makes an excellent point regarding forward foreign exchanges serving as de facto bets wherein the investor is speculating based upon potential future profits, which may or may not come into fruition. Therefore, it is risky but potentially lucrative if the ...

    Solution Summary

    Responses to foreign exchange rate questions are examined.

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