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In this scenario, the exporter sells commodities in Europe and all the payments are received in Euros. Therefore, a drop in the value of the Euro will be quite distressing to the exporter from a financial point of view. Despite the negative effects, the risks that are associated with a drop in the value of any currency can be controlled and alleviated in an efficient way. First, the exporter needs to monitor the trend of the exchange rate over a fixed duration.
This can be achieved by observing the movements in the exchange rate. The outcome of this observation exercise will guide the exporter when making forward contracts that have fixed values (irrespective of the exchange rate).
When traders anticipate that the value of the Euro will drop, then they can avoid entering into forward contract that have fixed values. Thus, when the value of the Euro decreases in value, the exporter will not be under contractual obligation to sell at a constant price. Instead, the exporter will be paid higher prices to compensate for a decrease in the value of the Euro. This strategy is quite useful to the exporter when they engage in large transactions that are susceptible to losses when the value of a foreign currency drops (Goyal 1).
Another option that is available to the exporter is the use of multiple currencies for international transactions. As mentioned in the case, all commodities are exported to Europe. Therefore, the exporter earns in Euros. However, the use of the Euro can be accompanied by another currency such as the US dollar. The choice of the US dollar can be attributed to the fact that it is recognized worldwide for international trade.
Thus, in the international market, all commodities can be traded using the US dollar. Further, the movements within the global currencies have always shown an inverse response between the value of the US dollar and Euro ( International Business Finance 145). Thus, if the value of the Euro drops, then the value of the US dollar will rise. If an exporter uses both currencies, the risk of making losses is minimized.
A drop in the values of Indonesian and South African currencies has an impact on the operations of the business. However, since the value of Chinese RMB has improved, then there exists a workable solution to the problem. A decline in the value of any currency indicates that the state of the economy is deteriorating and this may have a negative impact on the operations of companies that operates globally.
Thus, the large multinational consumer company will experience the negative consequences that arise from a drop in the value of a currency. For instance, the company will require more resources to produce commodities in Indonesian and South Africa because more money will be needed to purchase the same quantity of raw materials that were bought before the drop in currency. As the cost of production increases, the commodities that will be sold in these two countries should be priced higher in their respective local currencies. This will enable the company to preserve the value of their products.
The law of demand states that there is an inverse relationship between the price of a commodity and quantity demanded. Therefore, an increase in price will result in a drop in quantity demanded. Thus, if the multinational company increases the price of the commodity, then it is expected that sales will drop. This will lower the profit that is earned in the two markets. Therefore, a drop in the value of currency makes these two markets less profitable.
The company should respond to the reduced profits by decreasing the amount of money that is spent on the marketing. The overall goal should be to reduce the cost of marketing. From a production point of view, it is advisable for the multinational company to close all the production functions in Indonesia and South Africa. This should happen in the event that the drop in currency is persists (Avadhani 191).
In the case of the Chinese RMB, an increase in value of the currency shows that the economy of that country is performing well. This creates a suitable business environment for multinational companies. Growth in the value of Chinese RMB means that less money will be used in the purchase of raw materials. This will eventually lead to high amounts of profits. Therefore, the multinational company should consider moving the production plant to China due to the low cost of materials. However, the products can be sold globally once they are produced. Therefore, the company can sell the goods manufactured in China to South Africa and Indonesia. This will increase the chances of earning profit in these two countries, irrespective of the low value of their currencies (Shackman 361).
There are a number of factors that are often taken into consideration when predicting the value of a currency. In this scenario, it is stated that the foreign country is growing at a high rate and that there are several new foreign investments that are being undertaken. Also, the commodities are selling at half the price when compared to prices in the US. Thus, the value of the currency of the foreign country is expected to rise radically. The Big Mac at McDonalds trades at half the price of the same product in the United States. This can be interpreted that if the Big Mac is bought in the foreign country then it will require double the price in case the transaction is made using the US dollar (Agarwal 106).
This shows that the value of the foreign currency is double the US dollar. From an economic point of view, new foreign investments have a positive impact on the economy of a nation. This can be attributed to the fact that the foreign investment increases the ability of businesses to grow. This in turn leads to an improvement in the business environment and overall value of a nation. The total effect is that the currency of the foreign country will increase in value. As a financial manager, I will advise my boss in the US that the currency of the foreign country is likely to increase. Therefore, there is a need to expand business operations in this foreign country.
If the company which is based in the US expands in the foreign country, then it will benefit from growth in profit. This can be attributed to the fact that the currency of the foreign country will increase and become more stable. Besides, since the value of the currency is increasing, it implies that the company will spend less amount of money in the expansion program ( International Trade and Finance 251).
Works Cited
Agarwal, Vikas. Foreign Exchange Risks. International Financial Management, Mumbai, IND. Himalaya Publishing House, 2009. Print.
Avadhani, Vikas. Management of International Transaction Exposure. International Financial Management, Mumbai, IND: Himalaya Publishing House, 2010. Print.
Goyal, Ashima. Dealing With Currency Volatility. The Hindu Business Line. 2013. Web.
International Business Finance, New York, NY: Pearson Learning Solutions, 2014. Print.
International Trade and Finance, New York, NY: Pearson Learning Solutions, 2014. Print
Shackman, Joshua. The Economic and Financial Environment of International Business, Cypress, CA: Trident University Press, 2015. Print.
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