Introduction
Understanding the factors that affect global finance and the issues associated with its integrity is intrinsic to any analysis of the changes that occur in the global economic environment. By scrutinizing the influence of foreign exchange volatility rates on global finance, one will be able to derive insightful and significant information about general operational trends and principles in the global economy.
In ‘Measuring and managing economic exposure’, the eleventh chapter of his book Multinational Financial Management, A. C. Shapiro explains how foreign exchange volatility rates affect the analysis of global finance. Furthermore, the author explores some of the wide range of factors that determine the changes in global finance. By studying an extensive number of risks to which participants of global financial operations are exposed, Shapiro manages to create a clear and accurate portrayal of the subject matter.
Aspects of Global Finance
To handle the issues associated with operational exposure properly, a firm needs to assess the environment in which it operates. For instance, the key characteristics of the target market, including its saturation, the number and power of competitors, and other critical properties of the selected setting all have to be taken into account to prevent instances of financial loss (Shapiro 2014).
Furthermore, the design of a viable pricing strategy is another challenging task that an organization has to complete when entering their chosen economic environment. For instance, as Shapiro notes, the levels of import competition within a particular market may have a significant impact on the latitude in pricing set by a domestic company. Therefore, an in-depth analysis of the market and its key properties has to be performed as a means of reducing financial risks.
In the context of the global market, relating financial issues to other aspects of a company’s functioning is a critical step. According to Shapiro (2014), this proposed technique reduces the levels of risk. As the author explains, one factor that needs to be considered particularly closely is the extent of economic exposure to which an organization is subjected (Shapiro 2014). Thus, one will avoid a common mistake to which a large number of accountants are prone. Specifically, one needs to assess the levels of currency fluctuations and their effects on future cash flows (Shapiro 2014). This reduces the probability of risks associated with the miscalculation of future opportunities and threats that a company may face.
However, even with the available information at hand, determining the economic impact that fluctuations in exchange rates will produce in the future is highly complex. Shapiro (2014) states that, while being comparatively easy to locate and calculate, the exchange risk does not provide the immediate answers required to adjust a company’s financial strategy to the target market. Thus, embracing a vast array of variables affecting the financial security of a company is needed, even after a detailed analysis of exchange rates.
In the described scenario, the use of a hedging policy as a method of maintaining the value of corporate assets at the required level should be viewed as an option (Shapiro 2014). This technique allows for more careful control of price movements in the corporate assets and, thus, makes handling the emergent risks easier.
The analysis of currency-related factors and the integration of results into the future management of exposure issues should be the key to success in managing financial concerns in the target market. As Shapiro (2014) explains, with the use of the proposed tools, a financial manager will be capable of forecasting changes in the exchange rates and the levels of inflation within the target market. Thus, the probability of a company losing a significant amount of its assets will be reduced extensively, whereas the chances for increasing corporate profit margins will rise.
Addressing exchange risks with the help of an elaborate choice of a corporate production strategy is another method of reducing the risks related to exchange rate fluctuations. As Shapiro (2014) notes, a company must consider product sourcing as one of the strategies that can help a firm create a competitive advantage that will keep its financial assets secure (Shapiro 2014). Therefore, an organization needs to create a financial strategy that will be linked closely to all aspects of the firm’s functioning. It is only by encompassing all possible variables that can affect its financial performance that a company can produce a viable risk management framework and build a coherent financial strategy.
Conclusion
A detailed analysis of the key risks that affect financial performance in the global market has allowed Shapiro to build a profound and well-developed analysis of global finance about foreign exchange volatility rates. The chapter shows explicitly that the risks associated with changes in foreign exchange rates have to be taken into consideration when making financial forecasts and determining the changes in global finance. Thus, the author offers a broad and detailed overview of the key issues that one should consider when exploring financial risks and opportunities in the global market.
Reference List
Shapiro, AC 2014, ‘Measuring and managing economic exposure’, in Multinational Financial Management, Kindle edn, Wiley, New York, NY.