P4
Describe how the monetary environment affects businesses that operate internationally. What can you say about how the monetary environment affect the international trade of an international business? Include methods of protection against exchange rate fluctuations, the influence of international banks, trade support and government agencies in your response
International monetary environment
The international money market links all financial institutions , using electronic networks and technology to enable global transactions for the smooth operation of worldwide trade. These systems may be shared and agreed by the parties concerned- for example, the use of standardized bills of lading and letters of credit for the global shipment of goods.
Foreign exchange system and international money markets:
The foreign exchange market (FOREX) or FX is a market where different currencies are bought and sold, just like shares. An exchange rate is the price of one currency against another. For example: 1 pound may give you US$ 1,25 or 1,25 euro. The exchange rate of a country depends on its current economic conditions, such as inflation and interest rates. The majority of all transactions are in the UK, the USA or Japan.
When businesses trade internationally, they are at risk as they are dealing with different currencies. Due to the strength of certain currencies, most businesses deal either in Us Dollars, euros, Japanese Yen or pounds sterling.
Exchange rates influenced:
1. The price of imported and exported goods.
2. The overall level of price and wage inflation.
3. Tourism patterns( holyday destinations).
4. Consumers buying decisions.
5. Investors long term commitment s .
6. Pricing strategies for products or services promoted locally and internationally.
Methods of protection against exchange rate fluctuations.
Several factors influence currency exchange rate movements, such as supply and demand, interest rates in different countries, oil prices and political situations. A company cab reduce the risk associated with exchange rate fluctuations, the ways explained overleaf.
a. Forward transactions, the buyer and seller agree on an exchange rate for a date in the future. Money does not change hands until the agreed date when the transaction occurs, and takes place at the agreed exchange rate, regardless of the actual exchange rate on that date.
b. Future, the buyer sets standard contract sizes and maturity dates for future transactions. For example, the contract could be for € 10000,- for next November at a pre-agreed rate of exchange.
c. Swap, two parties exchange currencies for a certain length of time, agreeing to reverse the transaction at a later date.
d. Export credit guarantees, area type of insurance policy offered by a government organization,( ECA) guaranteeing the exporter that loans taken out to finance exported goods will be repaid in the case of non-payment by the importer. The ECA for the Netherlands is Atradius. Each year , Atradius insures billions of euros of business globally, making more than 20000 credit decisions daily.
International Banking
International banks lend and borrow in international markets and are, therefore, less affected by interest rate fluctuations that may affect domestic banks. Some foreign banks over better interest rates than domestic banks, providing a money-making opportunity for customers.
International banks make it easier for companies to do business around the world, for example, if a company has its account with an international bank it does not have to setup a different bank account in every country in which it operates. International banks may also offer payroll services to help a company pay employees working in different countries.
Other services offered by international banks may include trade credit, letters of credit , forfeiting, factoring and bills of lading.
International debt.
If you spend more than you earn, you will be in debt. International debt is money owed by a country to other countries, external organizations or financial institutions. For example, a country may obtain financial support from the International Monetary Fund ( IMF) to help their infrastructure or rebuild their country after a natural disaster or war. The money that the country owes the IMF is considered to be an international debt and , as with any other debt, there will be agreed terms or repayment.
Trade support
For a business to operate successfully in any county it requires support from many organizations, for example in the Netherlands, de Kamer van Koophandel, offers support to Dutch businesses trading with other countries and also to businesses trading within the Netherlands, to Dutch businesses trading with other countries and also to businesses from other countries trading with or within the Netherlands.
Government Agencies
The Dutch government provides support for international trading, and trade cooperation, through the Agency for International Business and Cooperation ( EVD). The EVD provides business information and financial support programmes to promote export and import business, and foreign investment.
A part of the EVD, the Netherland Foreign Investment Agency (NFIA) offers support to foreign companies investing, or wanting to invest, in the Netherlands.
The European Union has standardized a definition of small and medium-sized enterprises (SME’s) to equalize their competitiveness in markets with no internal borders. SME’s make a major contribution to the Dutch economy as more than a third in trade in international markets, mostly importing and exporting products, with Germany as he most important trading partner.
Trade associations
Trade associations operate in a particular area of business and industry. They offer support, training and advice to the workforce, promote common interest and set technical standards through guidelines and codes of practice. Trade associations operate locally, nationally and internationally to network and exchange ideas. Internationally, this exchange of information can be particularly important on the subjects of regulatory and health and safety issues.
Insurance
All organizations, whether local, national or international, need to consider various risks that they are likely to face in their daily operations. Some examples are : Risk to buildings and contents , risk to the health and safety of their workforce, risk to people visiting their premises, risk of non-payment for goods or loosing goods in transit and risk of staff having long-term illnesses.
All businesses will take out insurance policies against some of these risks. Some insurance policies are required by law.
Legal issues
Businesses need to understand the legal framework of the country or countries in which they operate. In the Netherlands, The Dutch Civil Code must be abided by.