The Types of Quote That Is Used in the United States - Assignment Example

SSАY АND QUАNTITАTIVЕ РRОBLЕMS Name Institution Course Date 1. a. The type of quote that is used in the United States is the direct quote. This means that the USD is the quoted currency against other foreign currencies. For instance, the Canadian dollar. It is at this moment expressed as CAD/USD, meaning that the USD which is the domestic currency is the quoted currency in this case (Brown, 2007). b. In Europe, there is the Euro whereby the specific currencies are used as the base currencies against the euro. This means that, for example, in the US, the expression is given as $/€. c. The quote used in the Australian market is the both the direct and the indirect. This is because, sometimes the US dollar is used in the purchase of items although, at many times, the Australian dollar is preferred (Brown, 2007). 2. If the Australian dollar is quoted against the US dollar as USD 0.801, this means that a single dollar note of 1 Australian dollar = 0.801 USD. In order to get the value of AUD 250, 000 therefore would be given as; 250, 000 × 0.801 = 2002250 USD 3. a. If GBP 1 = USD 1.2772, then $20, 000 are worth; 20, 000 ÷ 1.2772 = GBP 15, 659.25462 When converted back to USD; 15, 659.25462 × 87 = $1, 362, 355.152 b. 1, 750 ÷ 87 = 20.115 × 1.2772 = $25.691 are the USD that you would need. 4. The foreign exchange market contributes immensely to the society by providing a market that is run on a 24-hour basis. This is evident especially with the fact that the markets do open on Sunday evening in Australia and the other end close on the following Friday in the city of New York, the United States. This provides a global forum whereby business and creation of wealth is open all the time within a day, giving traders the opportunity to grow and eliminate poverty (Andersen et al., 2010). The society benefits a lot because there is no time that a working nation will lean towards poverty provided that the citizens are hardworking and get a platform or an opportunity to work. The society also gets to benefit from the high liquidity that comes out of the foreign exchange market and its transactions. Here, the word liquidity is used to mean the ability to convert a certain asset into cash that can be used to purchase other goods or assets. With the foreign exchange, currencies that are not applicable to be used to purchase goods and do other business transactions are exchanged (Brown, 2007). The businesspeople then obtain the currency that is applicable for use in that specific part, facilitating business. This improves the ease with which business transactions can be done, and no trader has to worry about any currency that they have and their ability to use that currency in a different country. There is also low transaction cost that is applied to the foreign exchange market, therefore, facilitating business in the easiest manner that can be thought. The traders who buy currencies and sell them do not charge a high cost, which is also known as the spread. The spread in the transaction is defined as the difference that is obtained between the buying and the selling of any currency. The market is regulated by the mechanism of supply and demand such that the spread is not high such that it may hinder the transactions that the business people are carrying out. When there is a low level of spread, the volume of the transactions that are carried out increases significantly and therefore trading activities are encouraged. Consequently, other businesses which depend on the exchanged foreign currency such as the tourism industry booms a lot. This is attributed to a smooth foreign exchange market. The level of economic activities do increase thus the economy is boosted a big deal. Traders have an added advantage to leverage. This means that the traders are allowed to trade more money than they have in their accounts. For example, a trader has some limited sum that is not enough for them to trade a volume that satisfies their interest (Frankel, & Froot, 2010). They can, therefore, use leverage to trade more until they achieve their desired levels depending on the capping on the leverage. This is because the leverage may be limited to a ratio of 50:1 which means that if a trader has 1 US dollar in his account, he can be able to carry out transactions worth 50 US dollars by the use of leverage. In this case, for every 1 dollar that a trader has, he will be allowed to trade 50 dollars instead. This increases the volume of transactions hence the revenue that the state earns ion the form of taxes from the foreign exchange market. The foreign exchange market makes it possible for some sectors of the economy to thrive. These are the examples of tourism sector as well as the import business. Tourists enter a foreign country carrying money that is in the form of their domestic countries’ currency and therefore cannot be used in paying for any services or purchasing any goods in the countries of destination. They, therefore, have to exchange the money in an attempt to convert it from the currency of their countries of origin to one of the countries which are their destinations. This is a business made possible, and without the foreign exchange market, such transactions would not have been effected. The society again benefits from the foreign exchange market by getting employment opportunities for their people, hence solving economic problems. 5. Firms going multinational i. Motives Why Firms Become Multinationals Firms grow from small enterprises to medium, and lastly, some opt to become multinationals. There are many reasons as to why the businesses decide to expand from the medium sized national enterprises and venture into the international markets. The reasons determine the activities and the nature of the activities that the firms participate in while in the international markets. The main reason for any form to venture into the international markets is to increase its market and earn more profit. The primary objective of any business enterprise is to make profits. This means increasing the capital and multiplying it by growing it so as to bring returns, therefore, creating wealth to the owner of the capital. A firm may look and see that its market that it is covering within the national boundaries is not enough and therefore in order for it to grow enough, it needs to expand to international boundaries. Confining a business to a specific country where the firm has its original place of domicile make the firm only a local one that cannot be able to compete in the international scope (Taylor, & Allen, 2007). When the challenge opens up to getting into their countries so as to market the product, there is the potential of growth whereby other customers other than the local ones are invited to contribute to the market of the company’s products. The form gets to make more sales than before and hence the chance of having more sales volume opens up whereby the growth opprotuniti4es are not limited. The company may be feeling that it has the power of competing internationally and therefore opens up the challenge to go global. In an attempt to increase the volume of the sales, the management makes a wise decision that sees them market the company internationally and invite other customers. This is where the business gets top realize its full potential given that the expansion allows the company to have international clients (Kroencke, Schindler, & Schrimpf, 2013). The expansion does allow the management to get other opportunities that present themselves for growth in the bid of gaining more profits for the business and expansion of the sales volume. This is a perfect opportunity for the management to showcase its effective skills that are contained in its staff. The company gets to open new branches and offices in other nations globally which allow for more opportunities that contribute to the profitability. In some circumstances, a business may not find the business environment as well as another factor such as the legal aspects favorable (Rodrik, 2006). This may be happening to the company in its country of domicile. In an attempt to see if the business can grow its productivity and fetch more profits for the owners, the management may decide to have it go global. The decision may bring about change in the company whereby the other branches in other countries may pick up well and be productive enough. An example is the Toshiba electronics company from Japan that found out that the market in Japan is not sufficient enough to fetch them the profits that the business is capable of attracting. Therefore, the decision to have it go global was a wise one as it has grown to be one of the most trusted electronics manufacturers (Rodrik, 2006). The second reason for a firm to go multinational is to spread the risk that the company faces when it concentrates its activities in one country. Sometimes, calamities do strike, and the management finds itself not in a position to sustain the heat of the calamities (Kroencke, Schindler, & Schrimpf, 2013). This means that the company has to spread the risk that it faces in the day to day activities such that should anything happen in one country, the other branches in the other countries internationally will come up and pull support for the enterprise not to fall. The collapse of a certain branch I one country may not significantly affect the others as they would come in the rescue of the affected branch. An example is the gambling company of the Bet way that set up branches all over the world in order to avoid a collapse in case there are some internal or external forces negatively affecting the business. Mostly, it is evident in many countries that gambling is perceived to be a vice and the governments try to discourage it (Kroencke, Schindler, & Schrimpf, 2013). This has forced the Bet way company to go global by becoming a multinational with the hope of having different branches that would ensure its survival. In the case in one country, such as in African nations whereby betting is seen as a wastage of resources, the government decides to ban gambling, the company may not be affected to the point of closure but will instead only feel some small impact. In cases where a company has not been able to diversify the risks that come along with the nature of the business transacted the enterprise may collapse any time because of a single thing. Such cases can be avoided through becoming multinational. In some other cases, it may be a national disaster that affects businesses such as an earthquake or a hurricane that is too difficult to prevent (Eiteman, 2009). Here, if the business had not diversified such risks, it ends up sinking, especially when there lacks a sound insurance industry. ii. A Motive Why a Firm May not Become a Multinational Expanding a business to become a multinational is not a process that is deemed to take one day. It is a long process that would even take years and to reverse the same would be difficult and complicated also. Sometimes manages and the owners of business organizations are opposed to the idea of having their businesses grow to become multinationals. This is not because they do not have the resources to expend or because they are not conversant t the idea of going global. A lot of challenges come with the globalization of a business such that the changes are almost impossible to reverse even when the business is at risk. The management crisis sets in where there is a central management, and it becomes extremely difficult to manage (Dymsza, 2005). Shaping the business may not be a simple task as the difficulties due to growth set in, bringing more problems to the executive. The business starts recording lower profits that it would have been getting if it was just concentrated in one specific country of operation. The challenge becomes tough as growth and its problems get out of hand which means that the business has just started spelling its own downfall (Dymsza, 2005). The many processes that bring hitches in managements become too much entangled thus slowly killing the business. Identifying a particular problem and correcting it where a business has already become a multinational is not such an easy task. An example of a business that opted not to become multinational in Australia is the Common Bank of Australia (Dymsza, 2005). 6. Purchasing power parity is a technique used by economists to determine the relative value of two different currencies. This theory further goes ahead to estimate the amount of the adjustment necessary to equalize the exchange rate so that it becomes equivalent to the purchasing power of the two respective countries (Rogoff, 2011). There are two different versions of the purchasing power parity theory whereby the two are the absolute and the relative one. The absolute purchasing power parity uses the direct estimation of the value of the currencies whereby direct comparisons are made. For instance, a basket of goods may cost 50 Australian dollars (Rogoff, 2011). Supposing that the same basket in the US is going for 25 US dollars, the comparison is between the 25 and the 50. This means that 1 US dollar is equivalent to 2 Australian dollars. This direct comparison is not valid in most times as the theory used very rigid and unrealistic assumptions. Such assumptions purport that there are no tariffs and even subsidies by the government do not exist. However, in the real sense, governments do subsidize some necessary commodities in the market to shield their citizens against rising cost of living. Also, tariffs exist as some imported goods are charged some taxes, and therefore the prices are not the same as they may be hiked (Rogoff, 2011). However, the absolute version does not believe in the existence of such characteristics. On the other hand, the relative version of the purchasing power parity calculates the exchange rate based on the base year, the exchange rates in the base year, and the current prices. This theory is more accurate and reliable than the absolute one. Despite this, the relative version has its own weaknesses (Balassa, 2005). One of the weaknesses is the price index that is used in the calculation. The one used is of the domestically traded goods when in reality it is the prices of the internationally traded goods that should be taken into consideration. Also, there are some loopholes whereby some sectors of the service industry are not taken into consideration. They include the banking sector. Generally, the relative version is more reliable than the absolute one when one bases the knowledge on the Big Mac Index. References Andersen, T. G., Bollerslev, T., Diebold, F. X., & Vega, C. (2010). Micro effects of macro announcements: Real-time price discovery in foreign exchange. The American economic review, 93(1), 38-62. Balassa, B. (2005). The purchasing-power parity doctrine: a reappraisal. Journal of political Economy, 72(6), 584-596. Brown, G. W. (2007). Managing foreign exchange risk with derivatives. Journal of Financial Economics, 60(2), 401-448. Dymsza, W. A. (2005). Multinational business strategy. Thunderbird International Business Review, 14(2), 21-22. Eiteman, D. K. (2009). Multinational business finance. Thunderbird International Business Review, 15(1), 12-13. Frankel, J. A., & Froot, K. (2010). Chartists, fundamentalists, and trading in the foreign exchange market. Froot, K. A., & Thaler, R. H. (2010). Anomalies: foreign exchange. The Journal of Economic Perspectives, 4(3), 179-192. Kroencke, T. A., Schindler, F., & Schrimpf, A. (2013). International diversification benefits with foreign exchange investment styles. Review of Finance, 18(5), 1847-1883. Rodrik, D. (2006). The social cost of foreign exchange reserves. International Economic Journal, 20(3), 253-266. Rogoff, K. (2011). The purchasing power parity puzzle. Journal of Economic literature, 34(2), 647-668. Taylor, M. P., & Allen, H. (2007). The use of technical analysis in the foreign exchange market. Journal of international Money and Finance, 11(3), 304-314. Read More