International Business Finance

Posted: December 2nd, 2013

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International Business Finance

1a)       Most multinational companies in the United States unfairly exploit sweatshop labor. This is attributed to the objective of the corporations, which is usually to make profit. These organizations focus highly on the production of products and services for global markets at the least possible costs in order to maximize profits. The exploitation of sweatshop labor in America is depicted by the violation of labor laws by garment plants in the country. Most of the exploited laborers in the country are usually immigrants, especially women and children who do not understand their rights and labor laws (Rivoli, 180). However, in order for the firms to gain maximum profits, sweatshops are created in other foreign countries, which limit the number of employment opportunities in the informal sector for wage laborers in the United States textile industry leading to increase in unemployment levels.

b)      Generally, agriculture is generally characterized by the extensive provision of government subsidies to producers. The provision of government support for farmers in the United States goes against the doctrines of free trade indicated by the country’s capitalist economy. By offering subsidies to farmers, the motivation to produce in terms of market demands is eliminated. Alternately, providing subsidies to farmers induces farmers to produce based on profit solely without assessing the indicators of loss and profit. Moreover, production based on loss and profit indicators and supply and demand forces expunges unfairness in the market. Moreover, continual provision of farm subsidies leads to a decrease in prices of the commodities, which promotes non-competition resulting from the inability of farmers who cannot receive the subsidies. The supported farmers are able to deposit agricultural commodities with low prices on the market at prices that the farmers who do not receive support can compete.

c)      The rapid movement of cash flows in contemporary economies can lead to stock market crashes, sudden stops in capital flows and asset bubbles in developing countries. Most developing countries usually rely on developed countries to receive loans and grants to ensure economic growth and sustenance. The high uptake of loans by developing countries increases a considerable current deficit that the developing countries are unable to solve. Due to the deficit, the balance of payments becomes distorted attributed to a lower current account deficit, which reduces the total demand for tradable commodities. Moreover, developing countries experience frequent currency devaluations due to the deficit. Financial institutions such as banks as well as organized exchanges cannot provide much assistance to ordinary citizens of developing countries due to the less gains experienced.

2.         Hedging refers to the offsetting of latent profits or losses which may be gained by an investment through financial market instruments. A hedge lessens the losses or profits realized by a person or a firm. Most forms have always hedged their currency exposures with instruments such as bonds, derivatives, and currency swaps and futures contracts (Mishkin & Eakins, 57). Usually, hedging is practiced by firms in order to protect firms against currency risks. The main reason attributed to the practice of hedging as a risk is the realization of cash flow liabilities. Hedging is a volatile decision and usually relies on speculation. For instance, a British investor hedges part of the currency exposure, if the Pound strengthens against the US Dollar, then payoff is gained from the dollar hedge. However, if the Pound weakens, the hedge experiences increased liabilities shown by the loss gained on the purchase of the pound.  Moreover, hedging is highly dependent on the level of foreign exchange. This means that, hedging against a particular currency increases the pay off to the firm if the foreign exchange rates increase; however, falling exchange rates lead to losses gained from hedging against the risk. Regardless of the liability of hedging, there are benefits appreciated from firms that practice hedging. Foremost, hedging allows multinational firms to finance foreign acquisitions. For instance, several firms use bonds as hedges. By issuing bonds, firms that do not have sales or operations in foreign countries can exploit low rates of interest or the respective currency speculated to weaken. Secondly, firms that require external financing will result to using internal funds, which will motivate the firms to implement hedging to smoothen out cash flows to meet funding needs. Thirdly, firms also practice currency hedging in order to transfer the foreign exchange risk by selling at prices that favor gains at a specified period through futures contracts.

3.         The U.S trade deficit is more susceptible to reduce if the dollar devalues. Foremost, the Dollar is extensively utilized in invoicing foreign trade. Regardless of the implementation of the Euro in European countries, much of the dollar is overly used in Australian and other Asian nations. This is because of the invoicing of exports directed to U.S by foreign producers in dollars. This causes the commodity prices to remain rigid in the currency of the buyer when the dollar devalues against other currencies. The exchange rate variations affect the profits of the foreign producers and thus do not increase the price in dollars paid by importers in the U.S. Furthermore, the exporters are offered a competitive and considerable market in the country, which leads to the reduction of margins rather than the transfer of costs to consumers in case of dollar devaluation. Both import quotas and tariffs lessen the amount of imports, increase the domestic price of commodities, decrease the welfare of consumers and increase the welfare of producers domestically. By imposing high tariffs, the government revenue will increase. Alternately, high import quotas will create surplus for companies that obtain import license. Moreover, increasing the import quota cuts on the rate of importation and boosts local production hence increasing domestic production. By increasing domestic production, the country is able to increase its exports, which will lead to an increase in exports and a reduction in imports hence closing up the trade deficit. However, increasing tariffs leads to an increase in the prices of foreign products such as raw materials, which can lead to excessive inflation attributed to the increase in prices of products produced from the materials.

4.         Bacon cannot be used as money with reference to the extensive three-part definition of money. Foremost, in terms of general acceptability, money is broadly accepted in the payment of commodities and services. Bacon cannot suit this definition because it is an unacceptable payment: not every person would agree to receive bacon as payment for providing services or goods. Secondly, in terms of descriptive definition, money is commonly accepted as a method of exchange and acts as a store and a measure of value. Bacon does not achieve this definition since it is not generally acceptable under the economy. Moreover, the production of bacon is determined by the value of money, hence a decrease or increase in value of money subsequently leads to a decrease or increase in bacon’s price respectively. Thirdly, under legal definition, money delivers and discharges debt and price contracts and is recognized under law as a form of exchange. Bacon, however, does not deliver nor discharge legal contracts, which involve money as the sole medium of transaction. Comparing with the gold standard and the Yap stone money, the bacon currency would force the government to be unable to inflate prices unlike with the dollar, which can be sued for price inflation.  In terms of the exchange rate, the bacon currency would create fixed exchange rates in the nations that have adopted it comparing to the gold standard and the Yap stone money. However, this will not be the same for the dollar induces variable foreign exchange rates and therefore augments trade uncertainties. Moreover, the bacon currency would limit economic growth attributed to its scarcity as well as high interest rates in comparison with the gold standard and the stone money. However, the dollar as an available and efficient means of currency boosts economic growth due to its abundance in circulation in the economy, which in turn has a direct effect in the lowering of interest rates.

5.         The double agency problem indicates the oversight of investors’ money by the money and the executives of the respective company. According to Stulz (1597-1598), the twin agency is characterized by the intervention of the company insiders who control the company and the state leaders who control resources. The company executives through their privileges avert from the company at the cost of external investors. The state leaders, on the other hand, manipulate the state resources, commandeer the firm and improve their well-being at the cost of every shareholder.  Both are twin problems since they obtain from each other. Expropriation by state leaders creates larger consumption of personal benefits by company insiders since any funds the executives abscond in the business will be partly used by the state leaders. There is the possibility of encountering a triple agency problem. The triple agency problem will be portrayed by the oversight of investors’ funds under mutual fund managers who will use their position to increase the funds they administer at the expense of small investors. Consequently, the company executives, through their power will take funds at the expense of the external investors while the state leaders, through their control of resources, will avert the firm at the expense of shareholders. The implication of the problem on investors of international markets will lead to less profitable gains due to the discretion of the state leader, which leads to tasks that establish corporate executives to assist in the increase of the expropriation risks by the country.

6a)     Free trade refers to the non-discrimination of imports or the non-implementation of tariffs and quotas on imports and subsidies respectively. Free trade is advantageous to the economy. Foremost, free trade guarantees fair and equal access to the market. This can be exemplified by the introduction of foreign products in the market, which provides considerable choice for the consumer. Free trade also creates employment opportunities due to the free access to participating countries by countries, which can open up franchises, offices or branches in the countries.  Additionally, free trade enables countries to specialize on their natural attributes such as the products and services ensuring quality of the products and services.

b)         Various reasons are attributed to trade restrictions as the cause of food problems in global markets. Foremost, trade restrictions lead to higher increase in food prices. For instance, the increase in rice prices in 2006-2008 was related to trade restrictions.       The increase in rice prices at the period increased by 217 percent. The rise of rice prices subsequently initiated an increase in its price between 2007 and 2008 in the international markets. The export bans led to the increase in rice prices in the global markets. Moreover, higher prices attributed to the impact of trade restrictions led to an increase in poverty rates, especially in developing countries, which were unable to receive subsidies in the international markets unlike other developed countries.

c)         Free markets allow for the determination of prices of products and services through the forces of demand and supply. The purpose of free markets is to ensure that there is no regulation of the market by the government thus relying purely on forces of demand and supply. Free markets lead to entrepreneurship in global markets due to less or no barrier to entry and exit in the economy. However, the free market economy requires the intervention of the government in order to ensure competition in considerable and vital industries. Additionally, free markets lead to the creation of monopolies attributed to privatization and merging of private companies.

Works Cited

Mishkin, Frederic S, and Stanley G. Eakins. Financial Markets and Institutions. Boston: Pearson Prentice Hall, 2009. Print.

Rivoli, Pietra. The Travels of a T-Shirt in the Global Economy: An Economist Examines the Markets, Power and Politics of World Trade. Hoboken: John Wiley & Sons, 2005. Print.

Stulz, René M. “The Limits of Financial Globalization.” The Journal of Finance. 60.4. 2005: 1595-1638. Print.