the assignment is based on starbucks , the citations must be from credible sources and book references for definitions, all work must be non plagiarized and hyper links for each reference required
International Business Economics and Markets
BASED ON STARBUCKS , WORK MUST BE non plagiarized, REFFERENCES MUST BE FROM CREDIBLE SOURCES , HYPER LINKS NEEDED FOR EACH REFERENCE
Question 4
Evaluate how your chosen organization might be impacted by exchange rate volatility and how such foreign currency fluctuations might arise. [20 marks, 700 words].
Discuss any three:
1. Currency fluctuation [265 words, 5 citations]
• Define what is currency fluctuation
• Discuss either appreciation or depreciation
• If your company’s home country depreciates relative to other currencies, what would be the impact on your organization:
o The price of imported raw materials used by your company would rise. This is a risk/threat to your company due to increased costs and reduced profits. Provide an example illustrating how this has occurred & discuss effects it had on your company
o The price of your company’s exports to other countries would fall. This is an opportunity for your company as your company’s products would be cheaper in the foreign market and more competitive. Provide an example to illustrate how this has occurred to your company and discuss the effect it had on your company
• If your company’s home country appreciates relative to other currencies, what would be the impact on your organization:
o The price of imported raw materials used by your company would decrease. This could be seen as an opportunity to your company due to reduced costs and improved profits. Provide an example to illustrate how this has occurred to your company and discuss the effect it had on your company
o The price of your company’s exports to other countries would rise. This is a threat for your company. Discuss the effect on your company
• Provide one solution to mitigate the risk of exchange rate fluctuation – choose one from risk avoidance, risk adaptation, risk transfer and diversification. Explain how this works and show how your company has done this
2.Global supply and demand shocks [265 words, 5 citations]
• Define what are global supply and demand shock
• Discuss the effect of the Covid-19 pandemic, the global banking/financial crisis of 2009, or any other global supply or demand shocks. Global supply chains have been disrupted, global demand has plummeted. What effect has this had on exchange rates
• How has a change in exchange rates arising from global supply and demand shocks affected your company? Please research
• Provide one solution to mitigate the risk of exchange rate fluctuation – choose one from risk avoidance, risk adaptation, risk transfer and diversification. You may also research any alternative risk mitigation strategy
• Define the risk mitigation strategy and show how your company has adopted this
3.Macro-economic policy [265 words, 5 citations]
• Define what is macro-economic policy [use of fiscal (taxes )and monetary policy (interest rates) adopted by the government/Central Bank to obtain macro-economic objectives]
• Explain the role that Central Banks play in macro-economic policy ie they can make adjustments to the rate of interest and exchange rate in order to pursue their own sovereign interests, for example to promote domestic economic growth or reduce a balance of payments deficit (a Balance of Payments surplus occurs when a country’s import expenditures are lower greater than its export earnings. This is considered favorable)
• How could a country’s macro-economic policy affect interest rates
• What effect does interest rates have on exchange rates (positively correlated)
• Provide an example to show how interest rate fluctuations caused by changes in a country’s fiscal and monetary policy cause the exchange rate to change and explain how this affected your chosen company
• Provide one risk mitigation strategy to combat fluctuating exchange rates
• Define this strategy and show how your company has adopted this strategy
4.Political and economic instability [265 words, 5 citations]
• Define what is political and economic instability
• Explain the effect this has on exchange rates (typically causes depreciation to occur, say why). Say why
• Discuss whether Brexit contributed to political and economic instability of the European Union and the effect it has had on exchanges rates especially the GBP and Euro
• Explain how has this affected your company? Favourably or adversely and why
• Provide one solution to mitigate the risk of exchange rate fluctuation – choose one from risk avoidance, risk adaptation, risk transfer and diversification. You may also research any alternative risk mitigation strategy
• Define the risk mitigation strategy and and show how you company has adopted this
Examples of risk mitigation strategies:
Risk avoidance
• You can try to avoid exchange risk by only selling and buying in your local currency. This may not be an effective strategy as your business can still be affected by the price of imported goods you need to buy, such as vehicles, machinery, steel or chemicals.
Risk adaptation
• Exchange risk adaptation involves hedging the risk. You can protect liabilities denominated in foreign currency with equal-value, equal-maturity assets denominated in that foreign currency. For example, let us imagine you have agreed to buy machinery from Germany at a cost of €100,000 to be paid in 180 days. To fix the cost at today’s rate you could purchase an asset in euros, such as a certificate of deposit, that will also be worth €100,000 in 180 days. When the time comes to pay for your German machinery, you sell the asset and, no matter how much your currency has changed against the euro, you have exactly the amount you need for the purchase.
• Even simpler, deposit the €100,000 in a euro-denominated bank account.
• An alternative approach might be to agree to sell a shipment of your company’s products for €100,000 in 180 days using a forward/futures contract
Risk transfer
• Another strategy for reducing exchange risk is exchange risk transfer. This involves a guarantee or insurance contract that transfers the risk to a guarantor or insurer. A business can insure against exchange risk and, in some countries, the central bank offers exchange risk guarantees to importers and exporters.
Diversification
• If your business holds assets in a variety of different currencies this provides some protection against exchange risk. This is referred to as currency diversification.
• If you hold half your assets in US dollars and the other half in euros, changes in the exchange rate between these two currencies will not be a problem for you. While one asset will be worth less, the other is worth more.