Generally, reserve currencies are forms of global currencies which are held in considerable quantities by many institutions and governments as a principal means of making international payments. Consequently, this implies that holding reserve currencies can be used in minimizing exchange rate risk as nations purchasing these international commodities will conduct the exchange in the reserve currency and not the national currency which may be inferior to the reserve currency.
Reserve currencies are usually strong currencies of various countries provided the currencies are being used on a global scale with many countries as well as fewer restrictions that may hinder its use. Reserve currencies used to be acceptable in terms of various precious commodities such gold among others but currencies take precedence over conversion of currencies into other commodities. Countries with the most foreign reserve currencies include China, Japan, Russia as well as various non-governmental organizations such as the European Union, European Economic Area and the Eurozone Kuepper, The British Empire was a major economic force to reckon with before the Second World War due to its vast wealth garnered from the colonies.
Its currency, the sterling pound was the reserve currency of choice but due to various adverse effects from the colonies which were fighting for independence led to its decline as the reserve currency.
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Since then the American dollar has maintained the record of being the major global reserve currency. The dollar further cemented its reserve currency status by engaging in business with many counties around the globe meaning that these countries adopted the dollar as their reserve currency. Additionally, the currency became the main currency for foreign-exchange transaction in international business as well as in international debt securities.
The foreign currency situation for expert motors in Europe
From this point of view it is interesting to note that when the Euro depreciated against the US dollar but appreciated against the mark it is hard to say that exposure to the Euro only had negative influences. In contrast exposure including transaction exposure and translation exposure obviously may hinder the competitive performance of EM or create losses for the company.
For example the diversified locations of producers can not only reduce economies of scale, which is particularly vital for a motor maker, but also raise the cost of goods transactions. Additionally in terms of investment the exposure to Euro might reduce the profit margins ultimately on investment return due to appreciation of the Euro which might occur in the future.
It is obvious in exhibit one that the purchasing of product elements occurs mainly in Germany and also at the same time that the major revenues of the company also originates from Germany.
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Although the cost of material and labour is comparatively higher in Germany profit return levels are attractive. Through its diversified suppliers in weaker currency countries the value of investment in Germany might drive the parent company to decide to use revenues in Germany to balance its exposure elsewhere.
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This is to say the value of investment might be higher than the expected level as well as display an unexpected loss. There is a significant effect on currency flows in terms of which when the home currency appreciates EM should avoid receiving payment from suppliers but instead adopt a policy of using forward contracts to reduce exposure risks. At the same time there might also be relatively small changes in exchange rates in other European countries which can provide EM with opportunities to balance its cash flow.
In addition in this case the company received a range of tax benefits from nationally pursued governmental policies in Hungary. By setting up a regional coordination centre there Expert Motors not only benefits from the absence of registration tax but also enables banks to finance investment projects through the centre at a much lower level than that available in other European countries.
This provides EM with a competitive advantage in terms of investment in Hungary which allows the company to respond to depreciation and appreciation events more effectively in balancing its investments across Europe holistically. The concept of hedging is essential in managing currency exposure risk including both translation and transaction exposure. Hedging currency exposure means establishing an offsetting currency position so whatever is lost or gained on the original currency exposure is exactly balanced by a corresponding foreign exchange gain or loss on the currency hedge, Shapiro, In terms of transaction exposure the company might employ protection measures which include the usage of forward contracts, price adjustment, currency options, and borrowing or lending in the foreign currency.
Likewise the TRC could try to invoice all transactions in dollars. However this can not avoid currency exposure risks entirely because of the future costs and revenues involved in such transactions.
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In the case of Czech Republic currency situation where the Czech Republic Koruny is comparatively weak EM has a competitive advantage over their major competitors due to the political contexts in which the TRC is embedded. In a forward market hedge EM can transform the currency by selling or buying forward dependent on if the company is long or short CRK In doing this, no matter what happens to the exchange rate of CRK EM still can collect its sale revenue upon which the dollar value is fixed.
Alternatively EM could avoid its transaction exposure altogether if the supplier allowed it to price the sale in dollars which shifts risks from EM to the buyers. This is because firms attempt to invoice exports in strong currencies and imports in weak currencies, Shapiro, It is a valuable risk management tool because by buying a call option on the foreign currency the firm is able to purchase at a maximum dollar price together with forward contracts in order to hedge the exposure to foreign currency.
The treasury function helps EM to centralize its treasury decisions and act in a coordinated fashion in treasury matters. Additionally Hungary has provided an excellent environment for EM in terms of varied forms of tax benefits and exemptions from foreign exchange regulations. In that the hedging decisions are made at head office with a focus on protecting future streams of earnings. Yet the protection of current earnings may be better handled it can be argued at local level by an increase in the response times to currency rate fluctuations.
Through location of its treasury function in Budapest EM is able to take advantage of locating on the European continent which is the main area in which it does business. First of all the advantage comes from the obvious benefits from tax breaks as well as investment opportunities. In this way when currencies in other European countries depreciate the risks can be shifted through the potential gains at treasury functional level.
This is the simplest way for EM to deal with small amounts in the same way which is able to propose new commercial contracts in a foreign currency over a certain size. Secondly the benefit can be seen from having the treasury function in Budapest by increasing the ability of the centre to gross up exposures in one currency from several of the operating companies.
Nevertheless the parent company in Florida is able to offer forward cover at market rates to the treasury function in Hungary thus it can retain its own decisions reflected in their local accounts. The primary intention is to analyze if the future of euro is moving towards success or failure given the social, economic and political factors. While the euro c as well as its policy framework has attributed to stability and prosperity in euro area, the global crisis identified the necessity to strengthen European economic governance as a remedy against future challenges.
Euro has gained importance in global markets by allowing global public and private investors to diversify their asset allocation and borrowers to find other sources of funding. Proper and timely actions by the European Financial stability Facility had helped a great extent in safeguarding euro so far. With the European Stability Mechanism being activated till June , financial stability of the euro area is expected to be in full transparency so as to revive in times of financial distress. Based on the size, depth, liquidity and openness of the domestic financial markets, can the euro be stabilized?
Need for a banking union thereby giving control to European Central Bank ECB to oversee all euro-zone banks in one step process. Government efforts are needed in order to devise economic and fiscal outline which are essential to the euro c. Efforts are also needed from financial market participants and supervisors, given that the maintenance of the financial market stability plays a crucial role for monetary and macroeconomic stability.
The main objective of this report is to assess the success or failure of implementing a unified c, being the Euro c. Examining this topic yields a look into the viability of having a uniform c across a region with similar economic and political attributes. When the idea of a single c was first suggested, doubts raised as to the credibility of the governance as each member states had different political heads. With the single c, however all these political heads would be combined as one governing body to govern all member states.
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Further, researching the different factors and aspects of what makes a c succeed or fail in meeting its set objectives shall provide insight into understanding the dynamics of the relationship between members of the EU. The vital factors that help judge the efficacy of a c are the size of the economy, political stability, and role in international trade, transparency and openness in domestic markets, easy convertibility to cash and impact of macroeconomics in preserving euro.
Relationship between EU members had been strengthened after the launch of euro. It has also paved the way for a single monetary council to govern the functioning of euro throughout the euro-zone. Moreover cross border trade had increased which was mainly due to creation of single c which cuts transaction costs. Transparency had also been maintained with the euro in domestic markets without price fluctuations.
This way Euro ensured easy convertibility of cash. Finally member countries which were financially rich in EU were used to backup poorer economies in EU, thereby ensuring financial stability whenever any of the macroeconomic components triggered a threat to EU. It was this backup which helped euro from failing to a greater extent when the crisis broke out.
The report also provides ground for analyzing the advantages of poorer EU member states adopting the Euro c. This will check the economic drive that can occur from having a monetary union between countries with varying economic statures. The advantages of poorer economies joining the euro can be said to be both an advantage as well as a disadvantage. Disadvantage can be attributed to the fact that salaries may be lesser in less productive areas when compared to salaries of employees in higher production areas.
This advantage is due to the fact that all of these employees are now paid in Euros. So indirectly it can pose a threat as the standard of living may vary from place to place, but the salaries remain the same, thereby generating problems in getting even basic daily household things.
For example, we may consider the following example between Greece and Germany. However Greece seems to be losing the race.
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The report also will touch on the aftermath of failures in the Euro, if any, and the remedial measures that can be adopted in case of such failures. This also gives indication to other regions that may want to adopt the strategies used by the Euro while avoiding the negative aspects of the Euro example.
There is a perception in euro that it is working only in favour of France and Germany, but the real fact is these countries have achieved little in terms of bargaining success. Even if they had been doing well, ii happens that in times of debt by other EU countries, such rich countries will have to take the burden of clearing unpaid bills, thereby making it impossible for such countries to decide on their infrastructure plans.
Moreover in the aftermath of crisis, TARGET 2 set for the purpose of clearing euro combined all imbalances between banks in the euro-zone. When the entire euro-zone was undergoing crisis, Germany was doing relatively well, thereby showing diversification in thoughts in terms of social and political issues.
In order to prevent failing of euro, policies have to be effectively modified in such a way that there is a win-win situation between both the financially rich and poorer countries, thereby ensuring equal competition. In times of crisis, EU member states can increase inflation rates for a while thereby ensuring their economic growth steady enough to get away from rising debts.
However these two can be achieved only with political integration by all EU member states. Having a monetary union and examining its performance is an example set by the Euro. In short to say, collapse of the euro is not bound to happen soon, however the stability of euro is unclear in the future. The first hand data will be gathered by distributing questionnaires and analyzing the results. The questionnaires shall be distributed on three banks in the Kingdom of Bahrain which deal with the euro c.