International Financial Management Research Assignment (Essay Sample)
Suppose you are a consultant who travels the world to make predictions about exchange rates for your clients. You have been hired to go to a foreign country to make a prediction about whether the value of the currency in this country will go up or down. When you arrive in this country, the first thing you notice is that everything is very expensive compared to what you are used to in the United States. Some items such as soft drinks or bottled water cost twice as much as what you pay at home. You also find that the economy in this country is starting to shrink a bit, and several foreign-owned businesses are moving out of the country. Would you tell your client that you expect the value of the currency in this country will increase or decrease? Explain your reasoning, and make references to Agarwal (2009) in your answersource..
1. Answer: The value of the currency of that particular country will decrease rapidly. As based on observation, the inflation is playing a big factor to this particular country’s economy. This is evidenced by expensive commodities and services, which makes it harder for foreign companies to comprehend with the currency stability of the country. The price of commodities and services is an indicator that the country is at risk for an economic crisis. By comparing the price of basic goods and services that are twice as high as commodities in the United States or even in Canada, this means that there is a large-scale problem with the economic stability of the country. This single market indicator suggests that companies are now making a drastic solution by increasing their prices due to a high inflation status of the country.
It is sad to say that the value of the currency is expected to decrease because the public is already suffering from the effects of a very high inflation. The foreign exchange sustainability of the country becomes weaker because of a consistent high commodity prices that challenges the consumers. This is brought about by a lesser exchange with the currency of the country because consumers prefer to save rather than to spend it with a certain commodity that is now considered as very expensive. If business operators from international countries start to move out from that particular country, it could further worsen the microeconomic stability of the nation. This is brought by having a decrease in the number of investments that should have been essential to keep the economy of that country in a healthy condition (Agarwal, 2009).
Another reason why the value of the currency in this country will decrease is that there is a strong volatility that has been applied by the stock market. Investors who are pulling out their shares from that country’s stock market is an indication that the movement of its foreign exchange condition. Lower stock market value drives away investors that can further stimulate the foreign exchange or the currency of the country to sharply decrease its value. Raw materials become more expensive, prompting shop owners to increase their commodities. Taxes, basic commodities, real estate value, transportation, and services will increase their values. More companies will file for bankruptcy because they can no longer sustain their shop’s return of investments. Other companies decide to move out from the country to seek for a better nation where prices are cheap.
The fourth reason is the inefficient banking systems of the country’s largest banks that further elevates existing foreign exchange risks that have been impacting both macro and microeconomic systems (Agarwal, 2008). Pre-need companies who are no longer effective enough to provide the financial needs of their plan holders can significantly affect the financial regulating systems of the country, prompting other companies to file for bankruptcy that leads to a high inflation rate. This situation affects the stability of the country’s currency because there ...
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