International Finance

INTERNATIONAL FINANCE

Running Head : International Finance

INTERNATIONAL FINANCE

In APA style 2008

International Finance

Stability of Exchange Rates

The development in exchange rate market in recent years does not encourage stability of exchange rate in the near future . In the increasingly connected world , companies are increasingly taking advantage of available resources in other regions . Thus , the number of foreign investments and foreign subsidiaries increases rapidly throughout the decades . This increases the risks generated by foreign exchange rate , in case fluctuations occur . Unfortunately , such fluctuations have been

happening quite frequently over the last decade Various predictions and have been proven wrong and multinational companies start to playing it save to cope with the increasing uncertainty in international financial conditions

Some of the causes of the increasing fluctuations and uncertainties in the world 's financial conditions can be easily defined . However , their multiplier effects are the ones that cannot be confidently predicted Most economic and financial experts have different opinions about the future of the world 's economy . One of the causes of these instabilities is the financial crisis started in America , known as the subprime mortgage crisis . Although not directly related to the money market , the crisis causes enough debacles that it reduces confidence in US economy 's dependability

The financial issues in America created multiplier effects which lead to the falling value of US dollar compare to other emerging economies , like China and EU and Japan . This created dilemma over the international business world , considering US dollar has always been the basis of economic and business predictions , of many MNE 's all over the globe Companies that have invested significantly in US companies might now consider withdrawing their investment and allocating their money to the next most promising investment ground , China

Another cause of instabilities within the world 's largest financial markets is the soaring price of oil and energy as a whole . Companies operating with large production capacities must reconsider their production plans and most planning ended up with decisions to decrease productions or to apply a safe strategy to anticipate further increase of energy prices . Some however , have stated that it is not necessary the increasing price of oil that causes instability of the financial markets , but it is the instability of the raise , and the inability to create convincing predictions about where the energy price will be in the near or further future

These instabilities cause businesses all over the globe to change their foreign investment strategies . Most allocated more money to account for risk management activities , especially after predictions indicated that fundamental macroeconomic policies and political uncertainties of the global world have the potential force to sustain the decline in dollar value . Furthermore , China 's decision to liberate its Renminbi from its dollar peg has increased predictions of more uncertainties to the future of dollar

The exchange rate markets are influenced by how people buy and sell currency 's as means of payments . However , with the presence of speculators , the level of uncertainties in how the...