Global finance - Admission/Application Essay Example

However, the accountant is also not right that there is no relationship between prices and exchange rates. The justification for huge price variations comes from the fact that there exist quite a few location factors that affect the prices of goods. These include product quality, costs of doing business in a country, cost of importing and exporting goods and services and the economic structure of a nation. The law of one price does not really hold true in the real world. There is a relationship between the prices and exchange rate which might cause differences in valuation of businesses but there are other factors which impact the valuations too.

Transactions exposure entail in exchange rate risks whenever a company engages in buying and selling of foreign currency for an unknown date in future. The key features of this risk are that it is contractual, it has an impact on the income statement and that it can be hedged (Chen, 2009). In this case, US imports VCR’s prepared by the Japanese manufacturers of GE. In the event of low demand for the video tapes, the price of VCR is facing tough competition and thin profit margins. When the VCR’s are imported, Japanese manufacturers allow a 90 day window for making payments ST Jr is having problems associated with foreign exchange deals.

The exchange rate fluctuation is impacting his business and when the dollar strengthens against the Deutsche mark, the business benefits because he has to pay lower amounts for his purchases of medical equipments from Germany. He is also able to sell quality produce of Germany at higher prices in the USA. However, when the dollar weakens, his business suffers as he has to pay more for the imported goods reducing his profit margins for the products sold in USA. On the other hand, S.T Jr also faces problems associated with treasury notes investment which were bought at higher interest rates.

His portfolio is very conservative with the bank