CONDUCTING BUSINESS GLOBALLY

Conducting Business Globally

Edwin Barahona, Michael Nighbert, Mike Pritchard, Chad Salcido
FIN/580
November 7, 2016
J. Phillip Harris

CONDUCTING BUSINESS GLOBALLY

Introduction

In our global economy, corporations today often want to expand their business operations
outside of their home country and into other foreign exchange markets where they can gain new
customers for their products and services. The purpose of this paper is to explore corporations
best practices with their business operations in foreign exchange markets.
Understanding Transactions in International Finance
Understanding the various types of transactions that occur in international finance is
crucial to a multinational corporation (MNC) in order to stay profitable and compete in the
global market. Three types that are covered in our class readings are Spot Transactions, Forward
Transactions, and Swap Transactions. Spot Transactions are the purchase of foreign exchange
with delivery and payment between banks taking place within the second following business day
or the first following day between the Canadian Dollar and the U.S Dollar (Eiteman, Stonehill &
Moffett, 2016). A Forward Transaction requires delivery at a future value date of a specified
amount of one currency for a specified amount of another currency. The exchange rate is
established at the time of the agreement, but payment and delivery are not required until maturity
(Eiteman, Stonehill, Moffett, 2016). Lastly, Swap Transactions have a simultaneous purchase
and sale of given amount of foreign exchange for two different value dates (Eiteman, Stonehill,
Moffett, 2016). Transactions that involve grains, oil, and gold would be considered under a Spot
Transaction. An example of a Forward Transaction would be airlines that purchase fuel in
contracts for a set price. Swap Transactions are most common with currency where the outcome
is to turn profit from the currency exchange rate.
Impact of Inflation
MNCs operate in a global environment that is both unpredictable and constantly
changing. They are exposed to risk from uncontrollable environmental factors such as inflation.

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Inflation is an economic factor that impacts a multinational companys profitability in a variety
of ways. First, inflation negatively impacts sales both domestically and internationally. Inflation
causes domestic demand for products and services to fall as purchasing power is diminished.
Also, the relative increase in prices reduce global price competitiveness causing demand for
goods and services to decrease in foreign markets. Next, inflation increases labor and raw
material costs. Wage per unit increases because workers demand wages that will allow them to
afford their basket of goods ("Costs Of Inflation In Business," 2013). Also, the cost of raw
materials and other inputs increase as domestic and international prices increase due to foreign
exchange devaluation and decreasing purchasing power. Finally, inflation can affect the cost of
borrowing and restrict access to debt financing. During inflationary conditions governments
enact monetary policy that restricts money supply by increasing interest rates thus increasing the
cost of borrowing. Inflation causes uncertainty making investment firms less willing to invest.
However, companies that have high levels of debt may benefit from inflation because it
effectively reduces the value of the debt.
Forward Markets for Currencies
When a MNC considers expansion overseas, the margins have the potential to increase
due to the wider range of market that the company will be providing for their product or service.
The increase in profits are a reflection of a domestic organization increasing their operations
overseas which enables a company to refrain from raising their prices by outsourcing their
employee base which in turn stabilizes the organizations fixed cost of employee salaries. As
companies move customer support operations to overseas, labor centers benefit from lower wage
costs (Ceniceros, 2003).
To further increase profit margins businesses may offer products or services that are
unavailable in certain parts of the world but are in high demand. By expanding business

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operations into these markets, one can establish a market niche without any immediate danger of
competition and the US dollar can be a valuable ally given the current exchange rates in most
developing countries.
The reduced wages to be paid to outsourced employees coupled with the current exchange
rates performing in favor of said organization can overall reduce the risk of operating as an
organization.
International Companys Reaction
Based on knowing the information explored in this paper, we predict that a MNC will
react cautiously and studiously when operating in a foreign exchange market. The MNC
management will want to ensure their management team has the most complete information on
understanding the business environment, inflation, and forward market for currencies in the
countries where they are doing business. They will want to gather this information when
developing their operational plan for a foreign business unit and they will also want to regularly
keep this information up to date as they continue to work in the foreign market. If the MNC does
not gather this data initially and keep the data up to date, then they run the risk of potentially
losing money overseas due to inflation or currency market volatility.
Conclusion
In conclusion, corporations that embark on operations in foreign markets must ensure that
they are fully aware of the risks to their financials that can come from overseas transactions,
inflation and forward markets for currencies, detailed in this paper. Companies that do this work
well should be poised to success, whereas companies that do not do this work are at risk of
failing in their overseas operations.

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References

Ceniceros, R. (2003). Moving Operations Overseas Offers Benefits, Challenges. Business

Insurance, 37(51), 4.
Nd. (2013). Costs of Inflation in Business. Retrieved from:
http://inflationdata.com/articles/2013/01/31/costs-of-inflation/
Eiteman, D., Stonehill, I. & Moffett, M. (2016). Multinational Business Finance (14th ed.).
Boston, MA: Pearson.