Question

1) Organizations do not operate in a vacuum and are subject to governmental regulation. This is particularly true with publicly traded organizations. Based on business here in the United States - who can name a few regulatory bodies that directly relate to financial management?

2) What exactly is risk aversion and can it relate to cultural differences? Even if you have never been overseas - can you give an example of this here in the United States?

3) I believe that we all know what currency is - think about having a United States dollar in hand. From a financial management standpoint, why is it important to understand currency fluctuations? What are some of the key factors that cause fluctuation?

Answer 1

Answer(1): Yes, That is true. Companies have regulation over it, they cannot operate in vacuum, they have to follow rules and laws of doing business. When it comes to public companies, these laws get more strict and tough.

Few regulatory bodies in USA related to financial management-

SEC- Security and exchange commission protects rights of investors in the stock market.

Federal reserve board- The board of federal reserve system is called FRB, it is responsible to make country's monetary policy.

Federal deposit insurance corporation- It is an independent body that is insuring deposits in case of banks' failure, it encourages stability in banking system.

Answer(2): Risk aversion- It is the behavior of people to minimize the risk. Risk is the future uncertainty. People when invest their money and get the similar return in both the alternatives then choose the alternative with lower risk.

Cultural difference influences risk aversion. There are people who are more risk averse persons, they can take more risk because they know that; High risk, high gain. There are few people who take lower or no risk because they are always afraid of losing their hard earned money.

Example: In USA, many people invest into stock market because they can take risk while in other countries, less people invest into share market, they rather keep their money safe with banks. In USA, 54% people invest into stock market while in India, only 2% people invest into stock market.

Answer(3): Understanding currency fluctuations- Currency fluctuations and their causes are necessary to know because companies operate globally, they do business in different currencies so fluctuation in currencies of different countries affect the revenues and profits of the company.

Key factors that cause fluctuations- Are as following:

• Inflation rate
• Monetary policy
• Economic conditions
• Political changes
• Government debt
• Trade balance
• Recession/Boom