INTERNATIONAL BUSINESS 5
Inthe balance of payment records, the following entries are entered asshown
1.U.S. resident purchases Mercedes-Benz C230 is a debit in thebalance of payment transaction because it represents a transfer ofgoods and the entry affected is the CA.
2.U.S. resident purchases Chevelle Impala, is a no entry in thebalance of payments transactions and, therefore, no account isaffected
3.Foreigner purchases GE dryer is a credit in the balance of paymenttransactions since this an export and the account affected is the KAaccount.
4.U.S. resident purchases UK stock is represented as a debit in thebalance of payment transactions. The debit entry is because thestocks purchased are from a different international country, and,therefore, the transaction is considered an overseas investment. Theaccount affected is the OSB account.
5.U.S. resident borrows funds from British broker to purchase stockis considered a capital investment and is recorded as a credit in thebalance of payment transactions. The account affected during thistransaction is the current account.
Thekind of exposure that the CFO of H&M is exposed to is operationalexposure and exchange rate exposure. This exposure is because H&Mis based in Sweden and the financial statements are preparedaccording to IFRS (Daniels& Radebaugh, 2015). Operational strategies are effective inmanaging exposure by impacting the on the overall operations of anorganization. Firms’ operations range from production, sourcing tomarketing among many others.
Operationalstrategies that manage exposure take into account these operations ofan organization and take advantage in case of improved competitivepositions. The operational strategies will further minimize exposureby limiting the harm that can be caused by competitive environmentsto the organization. Operational strategies for managing exposure arequite different from financial hedging strategies. The difference isthat financial hedging normally provides organizations with cashflows that respond to the behavior of the exchange rate movements.However with financial hedging strategies, the firm has no realeconomic action and thus the hedging is not quite effective.Operating hedging strategies are both short term and long term, andthey hedge against the economic exposure of an organization.
Pricingpolicies are one of the operational hedging strategies that firmsadopt to protect their organizations from exposure(Daniels& Radebaugh, 2015). Pricing policies ensure that an organizationsets the kind of price for their organization that will maximize theprofits to the firm. The pricing policies are mainly dependent on theexisting exchange rate and the kind of product that the price isbeing set. The pricing policy will further be pegged on the length oftime with the exchange rate is expected to last and the economies ofscale that arise as a result of large production processes. Longerexchange rates result in greater price elasticities and thus agreater economy of scale and higher possibilities of attractingcompetition. Increased competition will force the home currency tolower their exchange rate price, and this will result in increaseddemand because of the depreciation of the home currency. Some of thefactors that organizations should consider during pricing policy arethe impact of the policy on cash flows currently and in the futureand the retention of the market share in the long run.
Promotionalstrategies are other operational hedging strategies that firms canadopt to manage the operating exposure in their organizations.Promotional strategies include essential marketing programs that makeup the promotional budget. These are advertising, selling andmerchandising. Organizations should make their promotional budgetswith consideration of the prevailing exchange rate. It is importantto note that when the dollar is doing well, larger returns will beexpected from advertising promotional strategies and vice versa.
Organizationsmay further adopt production strategies that form part of operationalhedging strategies in ensuring they manage the operational exposurein their firms. One way of dealing with the managing of exposurethrough production strategies is ensuring that operations arediversified. Diversification of operations means that organizationsdo not specialize in a certain type of operation but combine manyproduction operations that are profitable to the organization. Thisdiversification can be achieved by combining production of amanufactured good with importing operations.
Thisprocess of diversifying risk forms a natural operating hedgingstrategy and this helps to keep foreign cash flows steady in cases ofexchange rate movements. However, this strategy has some limitationsto an organization and some of them include the fact thatorganizations may engage in activities that offer no comparativeadvantage (Daniels& Radebaugh, 2015). This engagement will mean that resources ofthe organization will be poorly allocated, and this will be a veryexpensive operational hedging strategy to an organization.
Diversifyingthe source of inputs in an organization is another effectiveoperational hedging strategy used in managing exposure. The goal ofeffective production strategy is usually to reduce the operatingcosts, and this can only be achieved through the purchase of inputsfrom overseas when the home currency has appreciated. The increase inthe home currency usually leads to increased production costs, andthis is mitigated with getting inputs for the production process fromabroad. The only limitation with this operating hedging strategy isthat constantly switching suppliers may lead to more expenses in theorganization.
Daniels, J. D.,& Radebaugh, L. H. (2015). Internationalbusiness: Environments and operations.Reading, MA: Addison-Wesley.