Individual Market Review (Essay Sample)

Individual Market Review
Foreign exchange rate is a primary determinant in business operations for multinational corporations. It affects cash flows for import and export transactions, and foreign investment decisions. The continuous change in values on international currencies indicates that a Chief Financial Officer has a daunting task in monitoring exchange rates movement. The concept of foreign exchange rate posits that different currencies have varying prices for various goods and services. Hence, this variation makes it possible to price one currency in terms of another. Demand and supply forces affect the commodities market, which then ultimately determine whether currency value goes increases or declines. Numerous economic factors influence foreign exchange rates including inflation, interest rates, trading volumes, and money speculation.
Inflation is a crucial factor in evaluating the strength of local and foreign currencies. It implies that there is excess money supply vis-à-vis the available goods and services, which cannot increase in time to regulate the prices or reduce inflation (Madura, 2011). Hence, exports lose their competitiveness and the prices of imported goods decreases. This scenario leads to an upsurge in imports consequently increasing the demand for foreign currency and weakening the subject nation’s currency.
Financial institutions lend money to borrowers and expect an interest amount for the total term of the loan. The basis of interest rates can be days, weeks, months, or years. High interest rates attracts investors to buy a currency and thus increase its demand in the process (Madura, 2011). Changes in interest rates are also affect the borrowing power of consumers and companies. Therefore, this affects the cash flow in the country and eventually the foreign exchange market. Interest rates have a negative correlation with exchange rates. For instance, if a nation wants more US treasury bonds, the demand for USD increases and makes it more expensive thus weakening the local currency.
Other factors such as money speculation and trade volatility are also decisive in evaluating foreign exchange rates. Major equity and bond markets have high levels of exchange rate volatility compared to countries that have lesser market participation (Moosa & Bhatti, 2009). High trading volume indicates high levels of speculation in the market, which leads to high price volatility of currencies.