Questions for Discussion
1. what is the ‘international capital market?’ And, why is it important to U.S. firms?
As our textbook defines it, the international capital market is a “network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries” (p. 227). In other words, the international capital market is what allows investment to flow across national borders. This is important to US firms as it increases the amount of investment that can flow into the US. Additionally, by giving US borrowers access to a larger range of lenders, US firms are able to drive down the cost of capital. Lower cost of capital means greater access to the funding necessary to drive growth.
2. Read Chapter 9’s introductory case, pg 227. The last sentence asks a question, “. . . Consider how shifting currency values affect financial performance and how managers can reduce their impact?” What is your answer to that question? Briefly give your explanation.
Working for an Australian company, I have learned first hand what affect currency values can have on a company. When I first joined the company, the conversion between US and AU dollars was somewhere in the range of AU$0.9763/$. This meant that the company was paying me less in Australian dollars than in US dollars. Effectively, they were getting a deal on my services. Since then, the pendulum has swung and we are exchanging at AU$1.3753/$. This means that I make much more in Australian dollars than US dollars. This, coupled with the necessary fees for exchanging currency, has made me one of the highest paid employees in my company.
At one time, my company employed a team of five in the US. When the exchange rate started dropping, all five of these employees suddenly became very expensive. In the end, the company chose to lay off three of its five US employees to save money. The mistake the company had been making all along was to convert the income of US customers from US dollars into AU dollars rather than to hold on to that currency and pay US employees from it. Converting currency back and forth in this manner was obviously expensive.
3. After listening/reading our media story and reading Chapter 9, we know U.S. firms that have large international operations must manage their international currency flows as one element of the ‘profit picture.’ Select one or two points from the Chapter that help U.S. managers “manage international currency flows when the dollar is strong.”
One thing US managers can do to manage international currency flows when the US dollar is strong is to avoid unnecessary currency conversions. In the case of my company mentioned above, the constant exchange of US dollars for AU dollars led to a noticeable squeezing of profit margins as money was lost in the transactions. Additionally, if US managers are confident the foreign currency will bounce back, they may considering accepting payments in foreign currency and hold onto that currency until the foreign economy strengthens.
Wild, J. & Wild, K. (2013). International Business: The Challenges of Globalization. (7th ed.). Upper Saddle River, NJ: Pearson.