Individual 4 international trade operation - Essay Example

This may greatly affect the success of such products taken to the markets. Any change in the international markets will greatly hinder the competitive success of such goods in the markets thus leading to staggering economic growth rates. Therefore, it means any form of currency fluctuations solely affects such goods priced in the local currency (David and Stewart, 2010). In addition, it is of crucial significance to acknowledge the fact that pricing of goods in the local currency is effective in easing price negotiations.

The ease in negotiation of prices is core in ensuring business success. As such, the customers will be ready and willing to participate in the purchase of such goods with relative ease. Pricing of goods in US dollars is quiet advantageous in several perspectives. First, in cases involving fluctuations of prices in the international markets, the effects are borne by the customers but not the producers (De, 2011). In this regard, the issue of pricing of goods in the U.S dollars becomes beneficial in the international markets.

The customers themselves must meet any financial inequity and challenges that may face such goods in the international markets. This eases the financial burdens on the side of the exporters. However, it is critical to note that pricing of goods in U.S dollars may be disadvantageous at times. This follows that pricing of goods in U.S dollars makes the process of price negotiations difficult (David and Stewart, 2010). This can greatly influence the fate of such products in the international markets.

Rate parity theory is a theory that relates the interest rates between two countries in terms of their differences and the effect that has on the foreign exchange rates (David and Stewart, 2010). The theory states that the difference that exists between the interest rates between such two countries becomes the difference realized in terms of foreign exchange rates as well as the spot rate regarding their currencies (De, 2011). The rate parity theory can be used to predict the future exchange rate in several perspectives.

First, with regards to the future purchasing power parity, the future exchange rates of two different currencies can be predicted using the formula below. Where (S1) is the Spot Exchange rate at the end of the period, (S0) is the spot exchange rate at the beginning of the period, (1+ IF) is the foreign inflation rate and (1 + ID) is the domestic inflation rate. It is of critical importance to acknowledge the fact that the major determinants of future real exchange rates depends on the nature of economic activities including growth in manufacturing leading to rise in economic productivity (Murthy, 2010).

This may also have some effects in the Forward Exchange Rates. Currently, the Spot Rate of Egyptian pounds relevant to the U.S dollar is at 6.89 and their Interest Rates is at 8.25%. However, the Interest rate of United States is currently at 0.25 %. The Forward Rate can be calculated using the formula below. Forward Rate = Spot Rate X (1+Interest Rate of Overseas Country)/(1+ Interest Rate of Domestic country) The current Forward Exchange Rate for the United States and Egypt can be calculated as shown below.

1 USD = 6.89(1+8.25%)/(1+0.25%)= 7.44 Egyptian Pounds. The Monetary policy refers to a system by which the monetary authorities, including