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International finance case study - Essay Example

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Since the beginning, all the manufacturing was done by the company on the homeland of United Kingdom. Board of Directors has always considered the entry of company into a foreign venture to…
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International finance case study
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Download file to see previous pages The will help the company gain competitive advantage over the global competitors. Though these benefits will exist but the company will face some financial issues that will be discussed in this report.
Ruritania is a politically stable and economically developing country, but the currency of the country is not very stable. Four years ago, when the Crown, Ruritania’s currency, was allowed to float freely by the government, there was a large drop in its value. In the past, the Crown had a centrally managed exchange rate. This caused the currency to have a fixed rate against the foreign currencies. The value of the currency dropped sharply when it was allowed to float freely in the foreign market. This is the evidence that a very low demand for the Crown existed in the foreign market. A floating exchange rate is self-correcting, as it fixes the exchange rate according to its demand.
Although the currency has shown stability now, but there is a risk of a drop in currency value in the future. This would cause the imports for the company to get expensive. If the company decides to purchase anything from foreign market, it will have to pay higher costs. If the company is importing raw material from another country, the price of the raw material will go up and the company will lose out. The final product of the company will also be priced higher because of the higher cost of raw material. This will cause the local competitors to gain a higher market share because they will be offering lower prices.
The Crown faces risk in the international market right now because only one and a half year has passed since it has been stable against the major international currencies. Eighteen months is not a very long period to determine the stability of currency of a country. Therefore this lack of a hard currency will restrict the ability of the company to import raw material from the headquarters in UK.
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