INTERNATIONAL FINANCIAL ENVIRONMENT

The International Financial Environment

The International Financial Environment

Case: “Integrative Problem”

Introduction

There are many implications of doing business in the current global scenario. Companies need to focus on many key strategies and aspects while conducting a trade or business between other countries. This paper attempts to answer some of the questions related to the integrative problems within the international financial environment. The main focus is Mesa Co. that produces picture frames that are exported from U.S. to U.K.

Answer 1

Relation between International Capital Flows, Interest Rates and Inflation

In case of differential inflation and fixed exchange rates, the relative prices between the two nations will be equal to the difference in the inflation rates of the two. This is to say that the exports of the inflating nation will rise in response to rising inflation (Philippe, 2009). In this case, countries can overvalue or undervalue their money by taking major administrative decisions which will help in controlling the negative consequences of inflation on trade proceedings. The value of the dollar will depreciate.

In case of changing interest rates in U.S, the demand for UK bonds will reduce and that of US securities will increase. Such a situation will cause US investors to demand less UK bonds and US investors will supply more Pounds to buy US bonds only. This scenario is an “excess supply” situation which will lead to an appreciation of US Dollars (Chance, Don, 2001). The exchange rate will eventually fall.

Answer 2

Appreciation or Depreciation of Pound In Future

Mesa Co. can expect that the dollar will appreciate in the future, in response to demands for US bonds and securities. The case in question suggests a scenario where exchange rates tend to show more changes in relation with capital flows than trade flows. So when interest rates in US will rise, the exchange ...