Efficiency of Currency Conversion - Essay Example

? Questions By Presented to Question one Currency conversion was a major challenge for the traditional businesses especially during the internationalization process. However, with the advent of the modern foreign exchange markets, it is possible to trade on the various currencies with minimal risks because the exchange rates are developed and maintained at a consistent level (Hope & Fraser, 2003, p. 45). The international foreign exchange market offers businesses the opportunity to trade using local currency thus increasing the business penetration in the global market. However, it opens room for unscrupulous short term currency traders with the aim of inflating the conversion rate for personal gains. Such challenges may lead to losses for businesses operating in countries with a weak currency thus allowing for the monopoly. The short term financial selling can be reduced by financial market players with the ability to control the currency conversion rates based on the globally agreed rates and competition. The foreign exchange and financial market are vital in improving business efficiency because they affect the revenue and expenditure of business in relation to the exchange rates (Mendleson, 2012, p. 123). Efficiency is improved when the foreign exchange market is stable leading to price stability in the product and service market. The success of businesses globally depends heavily on the foreign exchange market. Therefore, the foreign exchange market is vital in the global success of businesses because it affects revenue and expenditure. The success of foreign exchange market is revealed on the global success of the businesses based on other factors affecting globalization. The currency conversion rate is a vital factor in international business operations. Question three Currency crisis and the default crisis are related especially in the developing country. Normally, the currency crisis precedes the default crisis indicating the relationship between the two crises. The sudden drop in the exchange rate of a currency leads to serious challenge in the financial market which in turn affects the business operations in the country. In order to avert currency conversion crisis, countries must ensure that then conversion rates are maintained at a stable price which increases trust in the currency and improves the development of the necessary capital stability. In order to avert a currency conversion crisis, the country must evaluate it paper money value and maintain at a stable equilibrium (Boone & Kurtz, 2011, p. 96). Industrial countries tend to ignore the impact of the global currency conversion rate, which in turn affects their performance globally. Countries must engage in the global currency trade and ensure that the stability of the local currency is achieved. The achievement of currency conversion stability will avert default crisis and ensure success in the global market. The use of sovereign credit rating will improve the stability in the currency conversion rates which in turn leads to reduction of currency crisis. Sovereign credit rating plays an integral role in the determination of the extent to which countries have access to the international capital markets (Sorrells, 2012, p. 115). However, changes in the sovereign credit rating should not be viewed as the indicator of the existence or future occurrence of a currency crisis. In conclusion, default crisis can be averted by controlling currency crisis. Question five The derivatives market is a financial market based on derivative factors and financial instruments. These instruments include future contracts or options obtained from other forms of assets. The market is divided in to two namely exchange-traded derivatives and over-the-counter derivatives. Tailor-made derivatives cannot be traded on the future exchange market but are traded on Over-the-counter markets. They consist of investment banks with clients such as the hedge funds, government sponsored enterprise and commercial banks (Liker & Choi, 2004, p. 66). Future exchanges such as the Chicago Mercantile Exchange trade in standardized derivative contracts with a wide range of overlying products. In the market, the risk is transferred from one party to the other thus reducing the overall risk. The derivative markets have grown over the years because of the increased acceptance of the derivative markets. The positions of the Over-the-counter market have increased over the years since 2004 when the triennial survey was undertaken. Notional amounts have increased over the years by 135% in 2007 illustrating the increased acceptance of the OTC markets (Mendleson, 2012, p. 45). The growth of the capital and derivative markets has been facilitated by the development of the various international statutory bodies that control the international capital markets and the derivative markets. The growth of the Euromarkets can be attributed to the increase in the performance of the derivative and currency markets globally. The derivative markets have been increasing in the last decade which includes the development of the capital and the currency markets through stable operational environment. Question six The Basel accord is a set of agreements developed by the Basel committee on bank supervision providing recommendations on banking regulations. It focuses on capital, market and operational risks. The main focus of the accord is to ensure that the bank offer a platform for the development on the basis of capital. The Accord ensures that the banks have enough capital to meet obligation and cater for the unexpected losses. Therefore, the Accord ensures that the banks are bale to cover for losses and have enough capital to meet their obligation in case of liquidation and other relate financial crisis. The major cause of the major financial crisis in 2008 was the failure of the banks to operate with enough capital. The banks depended on the customer revenues which were above the capital accrued by the bank. Such disconnect led to serious challenges to the bank in case of unexpected losses which led to the development of complex financial crisis. The accord ensure that banks operate under a set guideline which ensure that it can address the various issues affecting its operation and take care of the capital and operational risks. The accord has two phases; the first face has been implemented while the second phase is scheduled for 2015 (Mendleson, 2012, p. 76). The completion of the two phases will improve financial security and reduce failure risks because banks will handle financial equivalent to its capital making the whole process easy regulate and control. The accord will regulate the bank operations perfectly. Bibliography Boone, L. E. & Kurtz, D. L., 2011. Contemporary Business. London: John Wiley & Sons. Hope, J. & Fraser, R., 2003. Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Havard: Harvard Business Press. Liker, J. K. & Choi, T. Y., 2004. Building Deep Supplier Relationships. [Online] Available at: http://hbr.org/2004/12/building-deep-supplier-relationships/ar/1 [Accessed 18 July 2012]. Mendleson, R., 2012. Labour And Globalization: As Conflicts Go International, Unions Follow Suit. [Online] Available at: http://www.huffingtonpost.ca/2012/01/27/labour-globalization-unions-international_n_1236103.html [Accessed 4 December 2012]. Parker, B., 2005. Introduction to Globalization and Business: Relationships and Responsibilities. London: SAGE. Sorrells, K., 2012. Intercultural Communication: Globalization and Social Justice. London: Sage Publications. Read More