Resources In The International Business Environment Answer

Question a. 

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i) Discuss the viability of both projects in the global context of business

Making decisions based on an understanding of the financial and economic environment of both organizations is made possible by competent management. The evolution of financial economic conditions in the businesses and industries in which they work will be impacted by well-informed strategy modifications. Additionally, it will be useful in determining how financial system changes will affect an organization and the sectors they are linked to. The project decisions must be criticized by the managers, who must also make recommendations for the best ways to raise money for the company on a global scale.

Making wise selections about the forex economy's policies is aided by this. The projects call for significant financial investment in the company. Given that both projects include the forex market, which is one of the busiest financial markets in the world. Because of the market's connectivity to the global interface, these events also have a significant impact on the forex market. Both projects had a discount rate of about 4%. the interest rate offered to borrowers in a financing situation in exchange for central bank loans (Dimitrova, 2020).

Those who receive significantly less compensation are granted money by the federal reserve. It must preserve the equilibrium between the money shortfall and the money used by each bank's characters to determine the discount rate. Trillions of dollars-worth of foreign exchange transactions are conducted daily by individuals located throughout the world. Numerous events, whether they are cultural or national, have an impact on currency values and foreign exchange rates.

ii) Analysis of discount rate

In order to make the discounting factor equal to the average of the US and UK currencies, it was changed to 4%. The federal government uses discount rates to manage the flow of available funds in an economy. Inflation and the nation's general interest rates are also impacted by discount rates. The availability of money in an economy indicates how likely inflation is to happen (De Vasconcellos, et al. 2019). As a result of the government finding it more challenging to reduce the amount of money available on the market, short-term interest rates have increased. Because there is less demand for money due to the low-interest rates, people start borrowing from the federal banks more often, which finally slows down the short-term interest rates. The 4% discount rate is taken into consideration for the analysis.

Table 1: Discount Rate for the Projects

Question b.

Investment needed for each project along with the NPV analysis

For the USD, the net present value is $5 million, whereas for the EUR, it is $931029.86. The net present value of the Euro is significantly lower than the present value of the USD overall. For project A which includes US dollars, Great Britain Pounds are required at the current exchange rate. The value of Project B, which comprises the European Euro.

Exchange rates can be of two different types. The spot exchange rate, which varies in accordance with the future exchange rate, is the first. The delivery date is decided upon later, despite the fact that the forward exchange rate is quoted and exchanged on the same day. Businesses involved in foreign currency are compelled to sell their goods internationally, but they would not get reimbursed for a year. The payment is required later in this kind of transaction. It cannot establish a price for the product without knowing the exchange rate.

Table 2: Net Present Value of the Projects

In order to determine the spot exchange rate between two currencies, one must enter into a forward contract that enables them to lock in at a particular rate for one year without knowing what the rate will be in the future.

The exchange rate over a year is used to calculate the currency rate. due to the fact that future exchange rates cannot be predicted. Prices for the spot exchange rate can be set, but the forward exchange rate cannot be chosen because money can be safely invested with banks to generate interest (Rana and Morgan, 2019).

Forward contracts are used to record larger transactions because the amount lost might be mediated by a sizable amount because the future value of the delivered money is greater than its current worth. It fixes the rate at the most recent agreed-upon price. This is accomplished by comparing the exchange rate of a specific currency with the base currency and the forward exchange rate, which must be the same as the future values of the currency quoted and the base currency. Utilizing the arbitrage opportunity enables the investor to convert the future worth of the currency into the current value.

Question c.

Mitigating the impact of possible exchange rate fluctuations

Every free market economy in the world depends on commerce, which is maintained by the exchange rate of the national currency (Nambisan, et al. 2019). The most monitored and manipulated economic indicators are exchange rates. The effect of the portfolio's real return is influenced by currency exchange rates. A country's imports are less expensive and its exports to overseas markets are more expensive when its currency is worth more. Unlike a low-valued currency, which raises the cost of imports while lowering the cost of exporting to overseas markets.

If a country's economy is predicted to have a negative trade balance and the exchange rate is high. A lower exchange rate can be used to regulate the balance of trade, which should improve the situation overall.

When a corporation heavily depends on a foreign currency that is translated into outdated home currency, there is a risk of exchange rate fluctuations. This raises the risk for investors because sales in the other nation can result in lower numbers when compared to US dollars. The greatest strategy to lower currency risk is to invest in an index fund, which is a compilation of many leading US and UK companies (Kahiya, 2020). The exposure to currency risk leads to sales and profits on the forex market. Diversifying the offerings to a worldwide customer is another strategy for lowering risk exposure.

Question d.

Selection of the project

The US dollar, the largest currency reserve in the world's forex market, must be chosen for Project A. It will be helpful in times of need and a valuable currency to combat inflation and recession. Additionally, it has a greater net present value than project B, which was funded in euros. The dollar is considered one of the strongest currencies in the forex market as it can buy more of a foreign currency than any other substitute (Kurt and Kurt, 2020). The goods produced in the foreign country will be cheaper to buy from the dollar if the currency from the manufacturing side falls. If the dollar weakens in the market, the price of imported goods will continue to fall and other lower-cost imports will also decline in price. This will increase the disposable income of the company so that it will be able to continue the project for the long term. The downside of choosing dollars over Euros as well, such as the exporter, will suffer when the dollar becomes cheaper as domestic lead produce goods will become more expensive in the foreign markets. The company will have a large portion of the business in the United States and the income from other countries will also decrease if the dollar continues to fall below the benchmark. The foreign investments required at the dollar reserves must be able to meet the effective demand of the market to fill the supply of the goods.

The traders in the foreign exchange market continuously rely on the fact that the dollar will be one of the most dominant currencies and all the other currencies are dependent on it. Even if the supply of other currencies might vary according to the demand and supply in their own economy, it will not affect the dominance of the dollar. Therefore the dollar has to determine the impact of rising prices on other currencies and helps to strengthen the weakness in the economy.

References

De Vasconcellos, S.L., Garrido, I.L. and Parente, R.C., 2019. Organizational creativity as a crucial resource for building international business competence. International Business Review, 28(3), pp.438-449.

Dimitrova, M., 2020. Of discovery and dread: The importance of work challenges for international business travelers' thriving and global role turnover intentions. Journal of Organizational Behavior, 41(4), pp.369-383.

Kahiya, E.T., 2020. Context in international business: Entrepreneurial internationalization from a distant small open economy. International Business Review, 29(1), p.101621.

Kurt, Y. and Kurt, M., 2020. Social network analysis in international business research: An assessment of the current state of play and future research directions. International Business Review, 29(2), p.101633.

Nambisan, S., Zahra, S.A. and Luo, Y., 2019. Global platforms and ecosystems: Implications for international business theories. Journal of International Business Studies, 50(9), pp.1464-1486.

Rana, M.B. and Morgan, G., 2019. Twenty-five years of business systems research and lessons for international business studies. International Business Review, 28(3), pp.513-532.