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Swiss franc plays a key role in the global financial market and due to the historic political neutrality as well as reputation for discreet and stable banking; the currency is considered a safe haven in the international capital markets (Horcher, 2013). Many international…
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THE SWISS FRANC: A CURRENCY FROM WHERE? Why is the Swiss franc a “haven currency” according to many international investors? Swiss franc plays a key role in the global financial market and due to the historic political neutrality as well as reputation for discreet and stable banking; the currency is considered a safe haven in the international capital markets (Horcher, 2013). Many international investors therefore prefer to keep their assets in Swiss franc due to its safety during the times of international turmoil (Butcher, 2011). International investors prefer it when there is high volatility in the financial markets because it is less volatile. For instance, it usually strengthens when the US stock prices crash, euro weakens and when the prices of bond in Spain, Greece and Italy rises. In addition, it strengthens during international turmoil (Balcerowicz, & World Bank Group, 2015).
2. Why have the unfavorable foreign exchange movements made the Swiss franc a “currency from hell,” according to a lot of Swiss firms, managers and employees?
Unfavorable foreign exchange movements cause significant appreciation in Swiss franc against the Euro as well as other main currencies thereby challengingly affecting Swiss managers, employees, and firms (Butcher, 2011). According to the perspective of Swiss importing firms, the unfavorable exchange rate movements normally cause the prices of exports to increase thus weakening the customer demand. It makes the Swiss products to be more expensive abroad thus creating a negative impacts on their demand and this directly affects the sales revenue of companies (Horcher, 2013).
On the other hand, unfavorable exchange rate movements greatly affect employees in terms of job loss and pay cuts. Low sales volume and profits due to low customer demand prompts firms to seek ways to survive and adapt by adjusting wages. Finally, it may force the managers to move their production to the euro zone in case they fail to cut wages and this also could cause more job losses at Mopac in Switzerland (Balcerowicz, & World Bank Group, 2015).
3. If you were the CEO of a medium-sized manufacturer in Switzerland, what are the options you consider in response to the spike of the Swiss franc?
I would have to move the production or the company to the euro zone because it is cheaper to produce in the region due to the weaker currency. Secondly I would have to cut wages to make the products cheaper thereby raising customer demand which in turn increases the sales volume and profits (Horcher, 2013). Thirdly, I would have to employ cross-border workers and pay them in Euros in order to cope with the appreciating Swiss franc. Finally, I would engage in simple currency diversification or currency hedging just like other large companies (Butcher, 2011). I would gladly accept Euros because it is weaker than the Swiss franc. The four options will greatly assist us in coping with the spike in Swiss franc (Balcerowicz, & World Bank Group, 2015).
4. As a tourist looking to have a vacation in Europe, you are very interested in Switzerland, but you are concerned about the high prices. What other European countries would you consider?
I would consider the euro zone due to the weak currency which results in cheaper accommodation. I would opt for Italy, Austria and France which also offers excellent skiing, very beautiful Alpine mountain scenery as well as other enticing tourist attractors just like in Switzerland but a relatively lower cost (Balcerowicz, & World Bank Group, 2015).
References
Balcerowicz, L., Rzońca, A., & World Bank Group. (2015). Puzzles of economic growth. Washington, DC: World Bank Group.
Butcher, K. (2011). Forex Made Simple: A Beginners Guide to Foreign Exchange Success. Hoboken: John Wiley & Sons.
Horcher, K. A. (2013). Essentials of financial risk management. Hoboken, N.J: Wiley. Read More
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