Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add information regarding the topic discussed. No citation required)
Please, respond to the below classmate discussion posts (250 words each). Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add information regarding the topic discussed. No citation required) Thank you Classmate discussion posts Discussion 1 Maria Valenzuela As a multinational business, the exchange rates directly affect the capacity of doing business internationally as it impacts profit. When comparing the pros and cons of a fixed exchange rate system and a floating exchange rate system, we find that these two are completely opposite. According to Majaski, 2019, “a fixed exchange rate is a regime applied by a government or central bank ties the country's currency official exchange rate to another country's currency or the price of gold. The purpose of a fixed exchange rate system is to keep a currency's value within a narrow band.” Fixed rates provide exporters and importers more peace of mind as they are more certain and because the government helps to maintain a low inflation, consequently the interest rates will be lower. At the end of the day, all of these benefits stimulate trade and investment. Even though as a business you could benefit from having a fixed rate because if the demand for your products are low or high, you will pay the same interest rates, not everything is beneficial when having a fixed exchange rate. Majaski, 2019, explains that “a fixed-rate system limits a central bank's ability to adjust interest rates as needed for economic growth. A fixed-rate system also prevents market adjustments when a currency becomes over or undervalued. Effective management of a fixed-rate system also requires a large pool of reserves to support the currency when it is under pressure.” Contrary to a fixed exchange rate system, a floating exchange system is a more open and freer market as the rate is determined by the demand, and if the currency is high the value will go up, and if the demand is low the currency price will be lower. According to Mitchell, 2019, “a floating exchange rate is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies. This is in contrast to a fixed exchange rate, in which the government entirely or predominantly determines the rate.” The negative aspect about the floating exchange rate systems, is that “central banks buy or sell their local currencies to adjust the exchange rate. This can be aimed at stabilizing a volatile market or achieving a major change in the rate.” (Mitchell, 2019). In many cases, I do not believe that an international business has the option to choose their exchange rate, as these are determined either by the government or currency. However, if I had to choose between these two exchange rate systems, I would choose a floating exchange rate because it would be more beneficial to the business as this is a more open and free market based on the demand. Also, so the business could pay depending on the demand because if it is low the company does not have to pay too much on interest rates. For example, if a country has a currency value lower than the country it is exporting it to, it could lead to major gains. This is the case of China when exporting products and goods to the U.S. because the value of its currency the Yuan is lower than the dollar, and because the amount of exports is high it results in profits for the Chinese companies. Reference: Majaski, C. (2019, April 14). Fixed Exchange Rate. Investopedia. Retrieved from: https://www.investopedia.com/terms/f/fixedexchangerate.asp Mitchell, C. (2019, April 9). Floating Exchange Rate. Investopedia. Retrieved from: https://www.investopedia.com/terms/f/floatingexchangerate.asp Discussion 2 Erik Ripley In international trade there is an exchange rate because different countries use different currencies. For the purposes of a big multinational business there are two main kinds of exchange rate systems. The first being a fixed exchange rate and the second being a floating exchange rate. A fixed exchange rate system is when the rate is set by the government or central bank and is seen as the official exchange rate (Staff, 2020). This set price is based off of a major world currency (Staff, 2020). This currency is usually the U.S. dollar but could be other currencies like the euro or yen. Using an example, if it is determined that a local currency is equal to $5 U.S. the central bank must ensure that it can supply the market with those dollars (Staff, 2020). This relates to a multinational business when looking to invest in different markets they can provide the high level of reserves needed for the government to maintain the economy. The main advantage to this is that a country with a fixed exchange rate system is attractive to foreign investors because of the stability and security that it offers (Borad, 2018). The disadvantage to this is that the government of a country following such a system has to maintain a huge amount of foreign exchange or gold reserves to maintain its value (Borad, 2018). Making this a more expensive investment for multinational businesses. A floating exchange rate system is where the rate is determined by the private market using supply and demand (Staff,2020). This is often coined as self-correcting as the discrepancies in exchange rate are automatically corrected by the supply and demand. So, if demand for a currency is low its value will decrease. Or if the supply of a currency is low its value will increase. These floating exchange rates are constantly changing. An Advantage to this is that it is not determined by any government and there is limited involvement international monetary organizations (Borad, 2018). This can allow businesses to create more jobs and increase profits. The disadvantage to this is that there is no formal backing by a government and the possibility of a default is high (Borad, 2018). Making these transactions riskier. In conclusion a Modern Multinational Business should lean toward fixed exchange rate because of their security and ability to insure the production and consumption of their product or service. But I see it being much more common for a multinational business to go with a more floating exchange rate because it can lead to higher profits and increased quarterly numbers for shareholders. In reality there are no such markets that have strictly a fixed or floating exchange rate. They all have some combination of the two and the degree of mixture is what determines what the exchange rate system is most like. So there is a degree of security and degree in risk in every exchange rate system and businesses have to do a real analysis of a local economy before determining if it is good to do business in certain places with certain exchange rates. References Borad, S. B. B. S., & Borad, S. B. (2018, December 29). Types of Exchange Rates: Fixed, Floating, Spot, Dual etc - Interpretation. Retrieved from https://efinancemanagement.com/international-financial-management/types-of-exchange-rates Staff, I. (2020, January 29). Floating Rate vs. Fixed Rate: What's the Difference? Retrieved from https://www.investopedia.com/trading/floating-rate-vs-fixed-rate/