Foreign Currency Risks - Assignment Example

Foreign currency risks Foreign currency exchange rate can be defined as the impact of currency rate fluctuations on business performance. In the recent history, the Ugandan currency has largely been stable over the years and its currency has not depreciated in the running year. This indicates that Ugandan currency has a few foreign currency fluctuations. Implications of foreign currency risks The PWC’s business performance will not be affected but it will benefit from it. Currently, the business performance of PWC has been productive and effective in those countries where the foreign currency exchange rate remains largely stable and the business performance of PWC has been less attractive in those countries where currency rate fluctuations occur frequently. Based on this assessment, the PWC will experience increase in business efficiency and business performance by venturing into the Ugandan market. Evaluation of basic functions of international banking system and financial market Bond Bond has been defined as a form of debt instrument having a maturity date more than a year. More importantly, bond is a promise that one would repay the principal amount along with interest payments as specified in agreement between lender and borrower. There are two types of bonds: secured and unsecured. The secured bond is one which is secured by the provision of collateral, which may be a physical asset or money that borrower pledges in case the borrower fails to repay the principal amount of the bond or its subsequent interest payment. On the other hand, the unsecured bond has no collateral attached. Equity “Equity funds are supplied by shareholders who are the legal owners of the firm” (Pandey 175). The PWC should use equity as the primary source of finance to fund its international business operations. Money Markets Money market is a segment of the financial market where financial instruments with higher level of liquidity along with short term maturities are bought and sold. In the conventional sense, they are used as a source of borrowing and lending money particularly for the short term or immediate finance needs. Mostly, the maturity of financial instruments is within one year. Bonds, equity and Money Markets and the PWC Equity and debt represent the two broad sources of finance (Chandra 435). These are the main sources of finance. Companies use bond and equity to raise capital for their international business operations. Bonds and equity are the major sources employed by companies for their business operations. Some companies use these sources of finance to meet their long term business objectives and others use them to satisfy their immediate business needs. And the PWC should consider them as sources of finance. Financing global operations: Financial strategy The PWC should use a mix of both sources for generating finance to meet the initial cost of investing. Normally, it is a practice in the business world to use either equity or bond to raise capital. However, the financial analysts consider this finance strategy as costly and less effective. In this regard, they contend that the interest cost of bond is comparatively more expensive and sometimes companies experience more interest cost payments than generating returns on the borrowed sum of money. The increase in interest cost payment is not only financially expensive but also increases the cost of doing business and it subsequently affects the business performance and business productivity in the long run. Keeping these facts in view, the PWC should finance its business operations by using a mix of equity and bond. Furthermore, the ratio between the two sources should be 60:40. The sixty percent of equity and forty percent of bond should be used to raise finance. Numerous business experts suggest that equity remains least expensive source of finance as there is no higher cost of capital in comparison with the interest cost of bond. Importantly, tax benefits are given in order to encourage using debt as the source of finance. Based on this assessment, the PWC should use this finance strategy to arrange finance capital for meeting the needs of the international business operations. The PWC may also avail the option of money markets. Sometimes, it is possible that the PWC may not be able to meet its short term finance needs or may not be able to fulfill its immediate business cost. In the business world, such circumstances are not exceptional but they may occur anytime. It is in the interests of the PWC to consider money markets as vital back up option while entering into new international market. For this purpose, the PWC should need to obtain information about the functional money markets not only in Uganda but also in Kenya as well. The reason for using Kenyan money markets is that there is no certain business environment inside Uganda and the routine functionality of money or financial markets cannot be predicted with certainty. In case no finance is arranged from the Ugandan money markets, the Kenyan money markets should be accessed. Portfolio management Portfolio management remains the most important business activity in which fund managers make the right and effective investments and ensure lucrative returns. The portfolio management may not be useful or relevant business options for the PWC as many skills and market know how are required for professionally managing the funds. Additionally, involving into this activity may affect the core business of the PWC. Capital budgeting “Capital budgeting is a process of investigation and analysis that leads to a key financial decision for both purely domestic firms and MNCs and is defined as the process of analyzing capital investment opportunities and deciding which, if any, to undertake” (Moosa 102). The PWC should use capital budgeting technique. Some companies along with the main business operations carry out investment strategy. The purpose of this strategy is to generate additional funds for meeting the long term business needs. Additionally, investment strategies are also designed and developed to generate funds internally instead of obtaining funds externally. The PWC should have a team of who should use capital budgeting technique and highlight lucrative investment opportunities as it would assist the PWC to generate funds internally rather than looking for the external financiers. Foreign direct investment “Foreign direction investment (FDI) is defined as directly investing in activities that control and manage value creation in other countries” (Peng 154). Foreign direct investment may not be effective and appropriate option for the PWC. Fundamentally, the PWC is not involved in manufacturing side of the business but offers advisory services. By involving into options such as foreign direct investment, the core business of the PWC may be affected as it may take away concentration from the core activities of the business. Recommendations International finance The PWC should consider opening up its branches or production in Kenya as the existing Kenyan business environment remains more lucrative in comparison with Ugandan business environment. Opening up branches or production in Kenya, which is near to Uganda, would enable the PWC to avoid the business restrictions inside Uganda. Economic trends The unpredictable economic trends must be handled with the survival tactics and back up strategies. There cannot be a uniform approach to handle the impacts of the unpredictable economic trends. Consequently, each trend and its effects on business should be separately seen and managed. Globalization impact The impact of globalization has increased the interconnectivity of Uganda with the rest of the rest of the world. The level of import and export activity has substantially increased. This increase offers a lucrative opportunity for the PWC as there would be substantial rise in demand for financial and advisory services. Monetary system The PWC should consider the significance of using statistics of balance of payments. The balance of payments would offer support to the PWC management in numerous ways. The statistics of balance payments should be used to determine the current level of import and export for designing their financial and advisory services. It would also enable the PWC to locate the different trends in the import and the export activity which may be employed to estimate the potential of the Ugandan economy. Subsequently, this would assist the PWC management to forecast the level of income from the current and potential business opportunities. Financial strategy The PWC should use a mix of equity and bond for the purpose of raising funds for the international business operations. The main reason for this strategy is that it offers less risky and more effective financial strategy to arrange the funds for the business operations. Additionally, the ratio between the equity and bond should be 60:40. This financial strategy is largely successful and more productive as well. The PWC should use money markets of both Uganda and Kenya. If the Ugandan money markets fail to provide immediate delivery of required funds, the Kenyan money markets should be approached. Capital budgeting The PWC should use capital budgeting for highlighting lucrative investment opportunities. The benefit would be that the PWC would not need diverting concentration from the core business operations. And it would also generate a possibility of producing funds internally. Works Cited Chandra, Prasanna. Financial Management: Theory and Practice. 7th ed. New Delhi: Tata McGraw-Hill. 2008. Print. Pandey, I.M. Finance: A Management Guide for Managing Company Funds and Profits. New Delhi: Prentice-Hall. 2005. Print. Moosa, Imad. A. Foreign Direct Investment: Theory, Evidence and Practice. Hampshire: PALGRAVE. 2002. Print. Peng, Mike. W. Global Business. Ohio: South-Western. 2009. Print. Read More