Gunjan Das submitted an assignment on international finance challenges for their course at SOA University. The assignment addressed 5 challenges: 1) protection of natural resources as increased international finance can affect the environment, 2) terrorism which can impact financial ties between countries, 3) cultural differences between countries must be considered, 4) businesses must follow the laws and policies of the nation they operate in, and 5) fluctuations in international currency exchange rates can impact deals between countries. The case study also briefly explained interest rate parity, which links interest rate differentials and exchange rates, and purchasing power parity, which compares standard of living between countries based on price of goods.
Gunjan Das submitted an assignment on international finance challenges for their course at SOA University. The assignment addressed 5 challenges: 1) protection of natural resources as increased international finance can affect the environment, 2) terrorism which can impact financial ties between countries, 3) cultural differences between countries must be considered, 4) businesses must follow the laws and policies of the nation they operate in, and 5) fluctuations in international currency exchange rates can impact deals between countries. The case study also briefly explained interest rate parity, which links interest rate differentials and exchange rates, and purchasing power parity, which compares standard of living between countries based on price of goods.
Gunjan Das submitted an assignment on international finance challenges for their course at SOA University. The assignment addressed 5 challenges: 1) protection of natural resources as increased international finance can affect the environment, 2) terrorism which can impact financial ties between countries, 3) cultural differences between countries must be considered, 4) businesses must follow the laws and policies of the nation they operate in, and 5) fluctuations in international currency exchange rates can impact deals between countries. The case study also briefly explained interest rate parity, which links interest rate differentials and exchange rates, and purchasing power parity, which compares standard of living between countries based on price of goods.
Gunjan Das submitted an assignment on international finance challenges for their course at SOA University. The assignment addressed 5 challenges: 1) protection of natural resources as increased international finance can affect the environment, 2) terrorism which can impact financial ties between countries, 3) cultural differences between countries must be considered, 4) businesses must follow the laws and policies of the nation they operate in, and 5) fluctuations in international currency exchange rates can impact deals between countries. The case study also briefly explained interest rate parity, which links interest rate differentials and exchange rates, and purchasing power parity, which compares standard of living between countries based on price of goods.
1. Explain in details the challenges. Of International Financial
Management in emerging economy. 1. Challenge of Protection of Natural Resources
When there is more international finance, its growth will
affect the natural resources. For example, after increasing the number of banks in India, ACs are used at large scale due to this, there is increasing the temperature of India. Who is responsible for this. Surely international banks are responsible who are opening the branches in India. Every increase in the number of bank branch means, 5 new installation of ACs which increases open environmental temperature. So, this is big challenge of international finance. It has to reduce by planting the tree and not to use ACs in office.
2. Terrorism
Terrorism is also main challenge of International Finance. If
any country will increase the terrorism in other country, its international finance will affected. Motherland is first and then, there is any international finance. India should ban all international finance and business relating to the countries which are promoting terrorism in India. Other countries which have the problem of terrorism, should strict ban on it if it has to increase its international finance with other countries.
3. Culture
International finance has also challenge of culture of each
country. India is veg. country. So, McDonnell and other non- veg. country should ban to produce the non-veg. in India.
4. Follow the Political Policies and Law of Nation
If business people have to grow international finance in any country, they have to make their policy according to the law and political policy of same country.
5. International Currencies
International finance also affects from international
currencies.You have some foreign currency if you have to deal with foreign country. At the time of dealing, you know what is the current market rate of forex. If your own currency is low value, you should wait for business, otherwise, your own capital will decrease at fast rate.
2. What is Exchange rate? Explain it the details of Exchange rate
mechanism
An exchange rate is a rate at which one currency will be
exchanged for another currency and affects trade and the movement of money between countries.
Exchange rates are impacted by both the domestic currency
value and the foreign currency value. In July 2022, the exchange rate from U.S. Dollars to the Euro was 1.02, meaning it takes $1.02 to buy €1.
Understanding Exchange Rates
The exchange rate between two currencies is commonly determined by the economic activity, market interest rates, gross domestic product, and unemployment rate in each of the countries. Commonly called market exchange rates, they are set in the global financial marketplace, where banks and other financial institutions trade currencies around the clock based on these factors. Changes in rates can occur hourly or daily with small changes or in large incremental shifts.
An exchange rate is commonly quoted using an acronym for the
national currency it represents. For example, the acronym USD represents the U.S. dollar, while EUR represents the euro. To quote the currency pair for the dollar and the euro, it would be EUR/USD. In the case of the Japanese yen, it's USD/JPY, or dollar to yen. An exchange rate of 100 means that 1 dollar equals 100 yen.
How Exchange Rates Fluctuate
Exchange rates can be free-floating or fixed. A free-floating exchange rate rises and falls due to changes in the foreign exchange market. A fixed exchange rate is pegged to the value of another currency. The Hong Kong dollar is pegged to the U.S. dollar in a range of 7.75 to 7.85.3 This means the value of the Hong Kong dollar to the U.S. dollar will remain within this range.
Exchange rates have what is called a spot rate, or cash value,
which is the current market value. Alternatively, an exchange rate may have a forward value, which is based on expectations for the currency to rise or fall versus its spot price.
Forward rate values may fluctuate due to changes in expectations
for future interest rates in one country versus another. If traders speculate that the eurozone will ease monetary policy versus the U.S., they may buy the dollar versus the euro, resulting in a downward trend in the value of the euro. Exchange Rate Example That is, the exchange rate is the price of a country's currency in terms of another currency. For example, if the exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY) is 120 yen per dollar, one U.S. dollar can be exchanged for 120 yen in foreign currency markets. Case Study. 3. Explain briefly the interest rate parity and Purchasing power parity.
Interest rate parity (IRP) is a theory according to which the interest
rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Understanding Interest Rate Parity (IRP) Interest rate parity (IRP) plays an essential role in foreign exchange markets by connecting interest rates, spot exchange rates, and foreign exchange rates.
IRP is the fundamental equation that governs the relationship
between interest rates and currency exchange rates. The basic premise of IRP is that hedged returns from investing in different currencies should be the same, regardless of their interest rates.
IRP is the concept of no-arbitrage in the foreign exchange markets
(the simultaneous purchase and sale of an asset to profit from a difference in the price). Investors cannot lock in the current exchange rate in one currency for a lower price and then purchase another currency from a country offering a higher interest rate.
For all forms of the equation: St(a/b) = The Spot Rate (In Currency A Per Currency B) ST(a/b) = Expected Spot Rate at time T (In Currency A Per Currency B)
Interest rate parity (IRP) is a theory according to which the interest
rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.
Purchasing power parity (PPP) is a popular metric used by
macroeconomic analysts that compares different countries' currencies through a "basket of goods" approach. Purchasing power parity (PPP) allows for economists to compare economic productivity and standards of living between countries. Some countries adjust their gross domestic product (GDP) figures to reflect PPP. Calculating Purchasing Power Parity The relative version of PPP is calculated with the following formula:
S=P2P1where:S= Exchange rate of currency 1 to currency 2P1
= Cost of good X in currency 1P2= Cost of good X in currency 2
Drawbacks of Purchasing Power Parity
Since 1986, The Economist has playfully tracked the price of McDonald's Corp.’s (MCD) Big Mac hamburger across many countries. Their study results in the famed "Big Mac Index". In "Burgernomics"—a prominent 2003 paper that explores the Big Mac Index and PPP—authors Michael R. Pakko and Patricia S. Pollard cited the following factors to explain why the purchasing power parity theory is not a good reflection of reality.6
Transport Costs Goods that are unavailable locally must be imported, resulting in transport costs. These costs include not only fuel but import duties as well. Imported goods will consequently sell at a relatively higher price than do identical locally sourced goods.7
Tax Differences Government sales taxes such as the value-added tax (VAT) can spike prices in one country, relative to another.7
Government Intervention Tariffs can dramatically augment the price of imported goods, where the same products in other countries will be comparatively cheaper.7
Non-Traded Services The Big Mac's price factors input costs that are not traded. These factors include such items as insurance, utility costs, and labor costs. Therefore, those expenses are unlikely to be at parity internationally.7 Market Competition Goods might be deliberately priced higher in a country. In some cases, higher prices are because a company may have a competitive advantage over other sellers. The company may have a monopoly or be part of a cartel of companies that manipulate prices, keeping them artificially high.8
The Bottom Line
While it's not a perfect measurement metric, purchase power parity does allow for the possibility of comparing pricing between countries that have differing currencies.
