Question

A key dynamic within any Multi National Corporation (MNC) is management of cash and also foreign exchange risk exposure. Cash management is critical and also heavily influenced by global dynamics. Within the Caribbean and South American jurisdiction, the economic framework is tightly connected with the major Asian economies of China and Japan, as well as the United States and the United Kingdom. The Caribbean and South American economy respectively, have been a barometer of the global economic cycle.

For the South American economy, many Multi-National Corporations   have made significant investments in order to achieve a reduction in the production cost of goods and also diversification benefits. Despite the benefits that could possibly materialize, some South American countries have weak banking systems and also have not been resilient through Global market shocks and Financial Crisis. This weakness may be as a result of politics and the quality of prudential supervision. Given this context, respond to the following questions which require research with respect to the localized context and also within the current market dynamics.

1) You have been asked to evaluate possible sites for a South American production facility that will manufacture your firm's products and sell them to the United Kingdom and Japanese market. Outline and discuss five (5) real exchange rate considerations you should entertain in your evaluation?

Answer 1

South America production facility that will manufacture your firm's products and sell them to the united kingdom and japanese market considering the real exchange rate:

• When the domestic currency has a high value its export are expensive this leads to trade deficit, decreased production and unemployment. If the currency value is low imports can be too expensive though exports are expected to rise.
• Through purchasing power parity we can determine the value of product after adjusting for price differences and the exccahnge rate.If goods can be freely traded across borders with no transportation costs, the law of one price posits that exchange rates will adjust until the value of goods are same in both countries.
• The balance of payments model holds that foreign exchange rates are at an equilibrium level if they produce a stable current account balance. If a currency is undervalued its nation exports become more affordable in the global market while making imports make expensive.
• The flows from transactions involving financial assets go into the capital account item of the balance of payment thus becoming deficit in the current account. The increase in capital flows has given rise to the asset market model.
• Asset prices are influenced mostly by people's willingness to hold the existing quantities of assets which in turn depends on their expectations on the future worth of the assets.