Economics of exchange rates Essay Example | Topics and Well Written Essays - 1000 words

Economics of exchange rates - Essay Example Operating under such a business scenario is too risky for any business. This is because, regardless of how much sales a business makes, and regardless of how much a business tries to minimize its costs and expenditures, it will always find itself on the receiving end, where its performance is not dependent on its efficiency or effectiveness but rather on the behavior of the foreign exchange markets (Sarno & Taylor, 2005, p. 83). XJP receives virtually all its supplies directly from J&J Ltd, which, in turn, invoices all the costs and expenditures in Euros. On the contrary, XJP makes its sales in Chinese Renminbi. Therefore, it has to convert the income made from the sales from the Chinese currency into the Euros so that it can submit its payment to J&J Ltd. This means that the amount XJP pays to J&J is not solely dependent on the value of the supplies it receives from this company, but also on the rate at which the Chinese currency exchanges for the Euro.... However, if the foreign currency gains over the local currency, XJP will be forced to pay the cost of supplies at higher costs. This will in turn reduce its profit margin (Moffett, Stonehill & Eiteman, 2008, p. 254). Therefore, system through which XJP and J&J structure and manage their currency exposure is not suitable for the business, since it influences their performance and growth negatively. This is because, even when they apply suitable strategies to grow their business and increase their profitability, it is not possible to achieve their targets, since the target will always depend on the exchange rates (Sarno & Taylor, 2005, p. 90). Therefore, the most suitable way for them to structure their business is employ a system that allows XJP to purchase and pay for its supplies using the local currency. This will serve to remove the uncertainty involved in the operation of the foreign currency markets, making it possible for the business to Strategize on improving its profitabilit y and consequently achieving the desired growth (Coyle, 2000, p. 41). Case Question 2: The situation in which XJP finds itself is very different from that of other foreign subsidiaries owned by J&J worldwide. This is because, while the other foreign subsidiaries are decentralized, allowing them to take responsibility of their own structure from top to bottom, the case is different for XJP. The organizational structure of XJP is characterized by a lot of control from its parent company. Thus, XJP is not capable for planning and procuring its own supplies, inclusive of the raw material, but instead depends on J&J to supply it accordingly (Moffett, Stonehill & Eiteman, 2008, p. 255). This arrangement might be beneficial for enhancing