price and finance

The international financial system

When conducting business across international boundaries, and dealing with foreign exchange, the risks rise enormously, especially the impact on financial resources and decisions, and particularly on pricing strategy. Foreign exchange is the way business can be conducted across national boundaries. Customers buy value, reflected in the price and intangible attributes of the product. Price is a function of cost in part, and foreign exchange affects the cost position. Foreign exchange rates, therefore, directly impact on the production quality and effectiveness of a company's marketing effort.

Most countries of the world are members of the IMF which, amongst its many functions, exercises surveillance over exchange rate policies of members, manages the SDR, provides temporary balance of payment assistance and technical assistance.

Foreign exchange

Foreign exchange is currency bought or sold in the foreign exchange market. The "market" is the total of persons who buy and sell and involves various financial and other institutions. The "spot" market is for the immediate delivery, or in the interbank market within two business days, of foreign exchange. The forward market is for future delivery. The principal players are the banks (interbank market) and others including the London International Futures Exchange (LIFE). For example, London, New York and Tokyo are the major markets with a turnover worldwide in excess of US$ 200 billion per day.

The foreign exchange market is very dynamic. The price of one currency in any other currency is the result of forces of supply and demand in the foreign exchange market. The demand for one currency may be due to consumers wishing to buy from overseas or a belief that one country's currency is stronger than another's. For example, In Africa, where exchange controls occur in some countries, this can lead to an official or unofficial black market. Also currency allocation is a feature which tends to slow down business or hinder its development.

If a country sells more than it buys, its currency value will rise and vice versa. If foreign exchange rates were set simply by money exchanged for goods and services then forecasting exchange rates would be easy. However, short and long term capital flows, speculative purchases and sales distort the picture.

Governments intervene to dampen fluctuation in exchange rates. Often they get involved in extensive trading to stem the rise in currency value so exports are not harmed.