Question

Consider the concept of financial contagion . This phenomenon is tied closely to speculation and the prospect of “futures.” Discuss how speculation can impact your organization’s decision-making abilities in areas of economic crisis (e.g. Greece, France, etc).

Answer 1

Concept of financial contagion refers to the spread of market turbulence from one economy to another economy. For example, financial crisis in 2008 of the USA, spread in different economies across the world. It is a case of financial contagion. It makes people, firms and other entities to speculate and predict the future. It affects the marginal propensity to consume and save by the households, investment decisions taken up by the firms and policies (monetary and fiscal) planning by the government & central banks along with other agencies.

At organization level, speculation strongly impacts the decision making process, regarding those geographical areas where the economic crisis has taken place, such as Greece, France and USA. Speculation will restrict the investment & pursuing of other opportunities in these markets where the center of economic crisis lies. Further, the organization will also limit the exposure of their funds in terms of the currencies of these  countries. Hedging initiatives will be taken to save the value of their exposure in these markets. Further, the organization will also restrict the hiring & recruitment process even in the domestic market, because of the financial contagion. The organization will adopt a policy of wait & watch and restrict investment and project expenditure decisions  in the light of reduced level of consumption and subsequently reduced aggregate demand in the economy. Hence, the organization will also be indecisive up to an extent, due to speculative uncertainties that will be brought by financial contagion.