FMS - global financial management

Question 1

role of global financial management strategies

Answer 1

a global business can respond to these influences by putting in place appropriate financial management strategies

They exist to mitigate or reduce the risks of interest rates, borrowing, currency and payment

Question 2

exchange rates

Answer 2

When a business transactions are conducted on a global scale, one currency must be converted to another.

This transaction if performed through the foreign exchange market

Question 3

currency fluctuations

Answer 3

The foreign exchange rate is the ratio of one currency to another, it tells how much a unit of one currency is worth in terms of another for example 1AUD =0.7584 or 75.84 US cents

When this ratio increases, we refer to that as an appreciation of the Australian dollar. It is now worth more of that foreign currency

When this ratio decreases, we refer to this movement as a depreciation of the Australian dollar. It is now worth less of that foreign currency

When the Australian dollar appreciates against the US dollar the US dollar depreciates against the Australian dollar

When the Australian dollar depreciates, the US dollar appreciates

Inverse relationship

Question 4

what cause these fluctuations?

Answer 4

The appreciation and depreciation of a country’s currency is triggered by a number of potential causes, including:

1. The relative health/strength of either country’s economy
2. Supply and demand of the individual currencies in the foreign exchange market
3. The difference between the countries interest rates

Question 5

Effects of these fluctuations (Appreciation of $A)

Answer 5

One Australian dollar buys MORE foreign currency

The prices of Australian exports are relatively more expensive and prices of overseas imports are relativity cheaper

It is cheaper for businesses to source and service overseas finance and individuals to travel overseas. It is more expensive for tourists in Australia

Question 6

Effects of these fluctuations (Depreciation of $A)

Answer 6

One Australian dollar buys LESS foreign currency

The prices of Australian exports are relatively less expensive and prices of overseas imports are relatively more expensive

It is more expensive for business to source and service overseas finance and individuals to travel overseas. It is cheaper for tourists in Australia.

Question 7

why is this important

Answer 7

Fluctuations in the exchange rate will make it more or less likely that a business will:

1. Have demand for their goods/service in Australia and/or overseas
2. Source funds and have the ability to pay off their debts in Australian and/or overseas
3. Make purchases on various inputs for their product in Australia and/or overseas

Question 8

interest rates

Answer 8

A business that plans to either relocate offshore or expand domestic production facilities to increase direct exporting will normally need to raise finance to undertake these activities

a global business has the option of borrowing money from financial institutions in Australia, or they can borrow money from financial markets overseas.

depend on the relative interest rates

the cash rate set by the central bank of a given country and its recent movement will give a strong indication as to the level and direction of other interest rates set by financial institutions

these rates are variable and can increase/decrease at least once per month, meaning the business should constantly be aware of the true cost of their borrowing

Question 9

A further consideration is exchange rate movements.

Answer 9

Any adverse currency fluctuation could see the advantage of cheaper overseas interest rates quickly eliminated

In the long term the ‘cheap’ interest rates may end up costing more

Changes in interest rates will therefore have a major impact on a business’s profitability if they have borrowed money from finance market overseas