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International Trade Operations in US - Essay Example

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The report begins with the risks and benefits of pricing goods in U.S. dollars or pricing goods in local currency when selling in a foreign market. Going in international trade demands a lot of knowledge over a number of issues including the interpretation, trends and implications associated with exchange rate…
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International Trade Operations in US
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International Trade Operations in US

Download file to see previous pages... According to the study findings international buyers who do not have US dollars as their local currency would have to go through the cumbersome process of having to convert their currencies to US dollars whenever they want to do business with you. The excesses in the procedure may just be one reason that someone may prefer other competitors to you. Again, the differences in exchange rate between the local currencies of international buyers and the US dollars will cause price flatuations. It is very likely that the price of good for each particular day will have to change because of changes in exchange rate. This, according to Gibbons creates currency swing, where by the customer may have to build in a 10-15% "adverse currency swing" factor. Conversely, quoting the US dollars may be very desirable when dealing with buyers who already deal in US dollars. It is common k knowledge that a lot of buyers around the world today are into the use of the US dollars. This is because it ensures uniformity in quantum price of goods and products. Again, quoting in US dollars very advisable for smaller companies with limited human resource as Gibbons, notes that “you may not have the ability to assume the currency risk, the currency exchange costs and the effort needed to run pricing in local currency.” Regarding quotation of prices in local currencies, once prices are quoted in local currencies and not in US dollars for international buyers, whose local currencies are not the US dollars would not have to create any price hedge to cater for the prices of goods. This is a major advantage for dealing with international buyers. This is because the duty of having to convert prices into US dollars and also having to go through the exchange processes, which sometimes attracts extra cost from banks would all be avoided. In would be observed that because pricing in US dollars creates price fluctuations, local buyers are often forced to hedge for the price of goods so that they will not have to be changing their expenditures so often. The converse demerit with pricing in local currency is that there would have to be a different price of same goods when they move from one country to the other. In this case, it is likely that by the time all sales are completed and the seller converts his earnings back to a common currency, there may be some little price falls because of the differences in US dollar rates in different countries (Colacito and Croce, 2011). Rate parity theory and how it is used to predict future exchange rates According to Forex Karma (2010), “Interest Rate Parity (IPR) theory is used to analyze the relationship between at the spot rate and a corresponding forward (future) rate of currencies.” The theory operates on a number of principles that makes it possible to predict future exchange rates. First, Picardo (2012) writes that “the basic premise of interest rate parity is that hedged returns from investing in different currencies should be the same, regardless of the level of their interest rates.” This means that future predictions of exchange rate can be made if returns on rate hedging remain constant. This is because in such as situation, both the exchange rate and interest rate do not have any influence on one another. The second has to do with the quote rates of interest rate and currency rates. This is because ...Download file to see next pagesRead More
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