Foreign Excahnge and Globalization - Research Paper Example

Foreign Exchange and Globalization Foreign Exchange Foreign exchange risk is involved when the company or a person holds investments or money in someforeign currency and that currency moves adversely in its value vis-a-vis currency of their own country. Moreover, the foreign exchange risk is also involved when the company plans its investment in a long-term project in some other country based on the current exchange rates; however, in due course of time currency rate movement goes against the company inflating its project cost and thereby jeopardizing the viability of the project.

Foreign exchange involvement plays a crucial role when the countrys export and import transactions are huge and constitute a large proportion of its total business. The adverse movement of the currency than expected may impact the companys profit and working immensely. This becomes even more crucial when the country’s production processes depend upon the imported raw materials. Any sudden upward or downward movement in the currency exchange rate may put the company in great financial losses.

This also affects a long-term budgetary planning process of the company. The best way of safeguarding from the fluctuation of the currency is to hedge the transaction in the currency exchange market. Several kinds of instruments are available in the derivative markets for hedging. One can sell or buy the currency in futures or forward market with a delivery at the future date. This prevents the possibility of any losses due to currency fluctuations. One can also enter into options contract in the currency market where one gets right to buy or sell the currency but not an obligation of the same.

Accordingly, one can buy Euros in futures market now at the prevailing rate with the delivery in 6 months so as not to get impacted in future by any kind of movements. Globalization Globalization in simple terms is an integration of economies of various countries wherein countries remove trade barriers or tariffs and allow transactions to happen. The benefit of globalization is that countries can take advantage of comparative advantage that they have in the market place. Globalization increases the efficiency in manufacturing and distribution sectors and makes available the goods at lowest possible prices.

Globalization has been a boon to consumers as they get best of the quality goods at lowest possible prices. Globalization has become important to the world economy now because it allows harnessing scare resources in the most efficient manner. Intense global competition helps in creating new products and services through innovation. Globalization has given way to the burgeoning financial markets worldwide. Capital now moves freely from one country to another without much of the restriction. Currency markets have become extremely vibrant and dynamic.

The daily volumes in the currency market involving more than 165 currency pairs have now reached to the tune of over $ 4 trillion. As financial market moves toward perfect competition, the discrepancies in the interest rates across the globe will gradually vanish in the times to come. In other words, the cost of money would have more uniformity across the world regardless of its origin. Financial Management in the future would have more global considerations and criteria with much lesser emphasis on local issues.

References Foreign-Exchange Risk (2012). Investopedia. Retrieved October 30, 2012 from http://www.investopedia.com/terms/f/foreignexchangerisk.asp Globalization (2008). International Monetary Fund. Retrieved October 30, 2012 from http://www.imf.org/external/np/exr/ib/2008/053008.htm