Global financing and exchange rates are important issues when considering starting a business abroad. In the procedure I will explain in detail what hard and soft coins are. Then I will go into detail explaining the reasoning for fluctuating currencies. Finally, I will explain the importance of hard and soft currencies in risk management.
Hard currency
The hard currency is generally from a highly industrialized country that is widely accepted throughout the world as a form of payment for goods and services. A strong currency is expected to remain relatively stable for a short period of time and to be highly liquid in the forex market. Another criterion for a strong currency is that the currency must come from a politically and economically stable country. The US dollar and the British pound are good examples of hard currencies (Investopedia, 2008). Strong currency basically means that the currency is strong. The terms strong and weak, rising and falling, strengthening and weakening are relative terms in the world of currencies (sometimes referred to as “forex”). Rise and fall, strengthening and weakening indicate a relative change in position from a previous level. When the dollar “gets stronger,” its value increases relative to one or more currencies. A strong dollar will buy more units of a foreign currency than before. One result of a stronger dollar is that the prices of foreign goods and services fall for American consumers. This can allow Americans to take long-delayed vacations to another country or to buy a foreign car that used to be too expensive. US consumers benefit from a strong dollar, but US exporters suffer. A strong dollar means that more foreign currency is needed to buy US dollars. American goods and services become more expensive for foreign consumers, who tend to buy fewer American goods as a result. Because more foreign currency is needed to buy hard dollars, dollar-priced products are more expensive when sold abroad (chicagofed, 2008).
Soft coin
Soft currency is another name for “weak currency.” The values of soft currencies fluctuate often, and other countries do not want to keep these currencies due to political or economic uncertainty within the country with the soft currency. The currencies of most developing countries are considered soft currencies. Often times, the governments of these developing countries will set excessively high exchange rates, pegging their currency to a currency such as the US dollar (Investment Words, 2008). The soft currency breaks down into a very weak currency, an example of this would be the Mexican peso. A weak dollar also hurts some people and benefits others. When the value of the dollar falls or weakens relative to another currency, the prices of goods and services in that country rise for American consumers. More dollars are needed to buy the same amount of foreign currency to buy goods and services. That means American consumers and American companies that import products have reduced their purchasing power. At the same time, a weak dollar means that prices for US products fall in foreign markets, benefiting US exporters and foreign consumers. With a weak dollar, it takes fewer units of foreign currency to buy the correct amount of dollars to buy American goods. As a result, consumers in other countries can buy American products with less money.
Fluctuating currencies
Many things can contribute to currency fluctuation. Some are as follows for strong and weak currencies:
Factors that contribute to a strong currency
Higher interest rates in the country of origin than abroad
Lower inflation rates
A domestic trade surplus relative to other countries
A considerable and constant public deficit that displaces domestic indebtedness
Political or military unrest in other countries
A strong national financial market
Strong national economy / weaker foreign economies
No record of default on public debt
Solid monetary policy geared towards price stability.
Factors that contribute to a weak currency
Lower interest rates in the country of origin than abroad
Higher inflation rates
An internal trade deficit relative to other countries
A constant government surplus
Relative political / military stability in other countries
A collapsing domestic financial market
Weak national economy / stronger foreign economies
Frequent or recent default on public debt
Monetary policy that frequently changes targets
Importance in risk management
When venturing abroad, there are many risk factors that need to be addressed, and keeping them in check is crucial to the success of a business. Economic risk can be broadly summarized as a series of macroeconomic events that can affect the enjoyment of the expected returns from any investment. Some analysts further segment economic risk into financial factors (those factors that lead to currency inconvertibility, such as external debt or current account deficits, etc.) and economic factors (factors such as public finances, inflation, and other factors). may lead to sudden higher taxes or desperate government restrictions on the rights of foreign investors or creditors). Altagroup, 2008. The decisions of companies to invest in another country can have a significant effect on their national economy. In the case of the US, the desire of foreign investors to hold dollar-denominated assets helped finance the large US government budget deficit and supplied funds to private credit markets. According to the laws of supply and demand, a greater supply of funds, in this case funds provided by other countries, tends to lower the price of those funds. The price of the funds is the interest rate. The increased supply of funds from foreign investors helped finance the budget deficit and helped keep interest rates below what they would have been without foreign capital. A strong currency can have both a positive and a negative impact on a nation’s economy. The same is true for a weak currency. Currencies that are too strong or too weak not only affect individual economies, but tend to distort international trade and economic and political decisions around the world.
Conclution
The hard currency is generally from a highly industrialized country that is widely accepted throughout the world as a form of payment for goods and services. A strong currency is expected to remain relatively stable for a short period of time and to be highly liquid in the forex market. Soft currency is another name for “weak currency.” The values of soft currencies fluctuate often, and other countries do not want to keep these currencies due to political or economic uncertainty within the country with the soft currency. Many things can contribute to currency fluctuation; Some of these things are inflation, a strong financial market, and political or military unrest. The decisions of companies to invest in another country can have a significant effect on their national economy. In the case of the US, the desire of foreign investors to hold dollar-denominated assets helped finance the large US government budget deficit and supplied funds to private credit markets.