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Lesson#12
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Dispute resolution and Exchange Rate
Environments
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FOREIGN NATIONAL ENVIRONMENTS
Dispute resolution and Exchange Rate Environments
Dispute resolution in international business:
Following issues are raised when thinking of business dispute
resolution by international marketers;
• Which country’s
law applies?
• In which country
should the issue be resolved?
• What technique
should be used to resolve the conflict?
• How will the
settlement be enforced?
The above questions are answered in following section.
Methods of International Business Dispute Resolution:
Methods of international business dispute resolution include:
• Lawsuits
(litigation)
• Negotiations
• Conciliations
• Mediation
• Arbitration
One could theoretically include violence or even war as part of
this spectrum, but dispute resolution
practitioners do not usually do so; violence rarely ends
disputes effectively, and indeed, often only
escalates them. Some individuals, notably Joseph Stalin, have
stated that all problems emanate from
man, and absent man, no problems ensue. Hence, violence could
theoretically end disputes, but
alongside it, life.
Dispute resolution processes fall into two major types:
• Adjudicative
processes, such as litigation or arbitration, in which a judge, jury or
arbitrator
determines the outcome.
• Consensual
processes, such as mediation, conciliation, or negotiation, in which the parties
attempt to reach agreement.
Not all disputes, even those in which skilled intervention
occurs, end in resolution. Such intractable
disputes form a special area in dispute resolution studies.
Conciliation
Conciliation is an alternative dispute resolution process
whereby the parties to a dispute (including
future interest disputes) agree to utilize the services of a
conciliator, who then meets with the parties
separately in an attempt to resolve their differences.
Conciliation differs from arbitration in that the
conciliation process, in and of itself, has no legal standing,
and the conciliator usually has no authority
to seek evidence or call witnesses, usually writes no decision,
and makes no award. Conciliation differs
from mediation in that the main goal is to conciliate, most of
the time by seeking concessions. In
mediation, the mediator tries to guide the discussion in a way
that optimizes parties needs, takes feelings
into account and reframes representations.
In conciliation the parties seldom, if ever, actually face each
other across the table in the presence of the
conciliator. (This latter difference
can be regarded as one of species
to genus. Most practicing mediators
refer to the practice of meeting with the parties separately as
"caucusing" and would regard conciliation
as a specific type or form of mediation practice -- "shuttle
diplomacy" -- that relies exclusively on
caucusing. All the other features of conciliation are found in
mediation as well.)
If the conciliator is successful in negotiating an understanding
between the parties, said understanding is
almost always committed to writing (usually with the assistance
of legal counsel) and signed by the
parties, at which time it becomes a legally binding contract and
falls under contract law.
Recent studies in the processes of negotiation have indicated
the effectiveness of a technique which
deserves mention here. A conciliator assists each of the parties
to independently develop a list of all of
their objectives (the outcomes which they desire to obtain from
the conciliation). The conciliator then
has each of the parties separately prioritize their own list
from most to least important. She then goes
back and forth between the parties and encourages them to "give"
on the objectives one at a time,
starting with the least important and working toward the most
important for each party in turn. The
parties rarely place the same priorities on all objectives, and
usually have some objectives which are not
on the list compiled by parties on the other side. Thus the
conciliator can quickly build a string of
successes and help the parties create an atmosphere of trust
which the conciliator can continue to
develop.
Most successful conciliators are highly skilled negotiators.
Some conciliators operate under the auspices
of any one of several non-governmental entities, and for
governmental agencies such as the Federal
Mediation and Conciliation Service.
Mediation
Mediation in legal terminology comprises an act of bringing two
states, sides or parties in a dispute
closer together toward agreement through alternative dispute
resolution, a dialogue in which a
(generally) neutral third party, the
mediator, using appropriate
techniques, assists two or more parties to
help them negotiate an agreement, with concrete effects, on a
matter of common interest. More
generally speaking, the term "mediation" covers any activity in
which an impartial third party (often a
professional) facilitates an agreement on any matter in the
common interest of the parties involved.
Mediation applies to different fields, with some common peculiar
elements and some differences for
each of its specialties. The main fields of mediation include
commerce, legal disputes and diplomacy,
but forms of mediation appear in other fields as well. Mediation
in marriage technically belongs in the
category, although it has followed its own peculiar history
since the times of ancient Greeks: compare
marriage counseling.
Common aspects of mediation
Mediation as a process involves a third party (often a neutral
third party) assisting two or more persons,
("parties" or "stakeholders") to find mutually-agreeable
solutions to difficult problems.
People make use of mediation at all levels and in all contexts,
from minor disputes to global peace talks.
This makes it difficult to provide a general description without
referring to practices in specific
jurisdictions - where 'mediation' may in fact have a formal
definition and in some venues may require
specific licenses. This article attempts only a broad
introduction, with more specific processes (such as
peace process, binding arbitration, or mindful mediation)
referred to directly in the text.
While some people loosely use the term 'mediation' to mean any
instance in which a third party helps
people find agreement, professional mediators generally believe
it essential that mediators have
thorough training, competency, and continuing education.
Some few of the types of business disputes or decision-making
that often go to mediation include the
following:
• Financial or
budget disagreements
• Family businesses
• Estate disputes
• Workplace:
• Wrongful
termination
• Discrimination
• Harassment
• Grievances
• Labour management
• Public disputes
• Environmental
• Land use
• Disputes
involving the following issues:
• Landlord-tenant
• Homeowners'
associations
•
Builders/contractors/realtors/homeowners
• Contracts of any
kind
• Medical
malpractice
• Personal injury
• Partnerships
• Non-profit
organizations
Mediation commonly includes the following aspects or stages:
• a controversy,
dispute or difference of positions between people, or a need for decision-making
or problem-solving;
• decision-making
remaining with the parties rather than imposed by a third party;
• the willingness
of the parties to negotiate a positive solution to their problem, and to accept
a
discussion about respective interests and objectives;
• the intent to
achieve a positive result through the facilitative help of an independent,
neutral
third person.
In the United States, mediator codes-of-conduct emphasize
'client-directed' solutions rather than those
imposed by a mediator in any way. This has become a common,
definitive feature of mediation in the
US and in the UK.
Mediation differs from most other adversarial resolution
processes by virtue of its simplicity,
informality, flexibility, and economy.
The typical mediation has no formal compulsory elements,
although some common elements usually
occur:
• each party
allowed to explain and detail his/her story;
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• the
identification of issues, usually facilitated by the mediator;
• the clarification
and detailed specification of respective interests and objectives;
• the conversion of
respective subjective evaluations into more objective values;
• identification of
options;
• discussion and
analysis of the possible effects of various solutions;
• the adjustment
and the refining of the proposed solutions;
• the
memorialization of agreements into a written draft
Due to the particular character of this activity, each mediator
uses a method of his or her own (a
mediator's methods are not ordinarily governed by law), that
might eventually be very different from the
above scheme. Also, many matters do not legally require a
particular form for the final agreement, while
others expressly require a precisely determined form. Most
countries respect a mediator's
confidentiality.
Mediation in business and in commerce
The eldest branch of mediation applies to business and commerce,
and still this one is the widest field of
application, with reference to the number of mediators in these
activities and to the economical range of
total exchanged values.
The mediator in business or in commerce helps the parties to
achieve the final goal of respectively
buying/selling (a generical contreposition that includes all the
possible varieties of the exchange of
goods or rights) something at satisfactory conditions (typically
in the aim of producing a bilateral
contract), harmonically bringing the separate elements of the
treaty to a respectively balanced
equilibrium. The mediator, in the ordinary practice, usually
cares of finding a positive agreement
between (or among) the parties looking at the main pact as well
as at the accessory pacts too, thus
finding a composition of all the related aspects that might
combine. in the best possible way, all the
desiderata of his clients.
This activity is sometimes scholastically included among those
of the auxiliary activities of commerce
and business, but it has to be recalled that it differs from the
generality of the others, because of its
character of independence from the parties: in an ordinary
activity of agency, or in the unilateral
mandate this character is obviously missing, this kind of agent
merely resulting as a longa
manus of the
party that gave him his (wider or narrower) power of
representation. The mediator does not obey to any
of the parties, and is a third party, looking at the
contraposition from an external point of view.
Subfields of commercial mediation include work in well-known
specialized branches: in finance, in
insurance, in ship-brokering, in real estate and in some other
individual markets, mediators have
specialised designations and usually obey special laws.
Generally, mediators cannot practice commerce
in the genre of goods in which they work as specialized
mediators.
Competence of the mediator
Numerous schools of thought exist on identifying the
'competence' of a mediator. Where parties retain
mediators to provide an evaluation of the relative strengths and
weaknesses of the parties' positions,
subject-matter expertise of the issues in dispute becomes a
primary aspect in determining 'competence'.
Some would argue, however, that an individual who gives an
opinion about the merits or value of a case
does not practise true mediation, and that to do so fatally
compromises the alleged mediator's neutrality.
Where mediators are expected to be process experts only (i.e.,
having been employed to use their skills
to work through the mediation process without offering
evaluations as to the parties' claims) competence
is usually demonstrated by the ability to remain neutral and to
move parties though various impasse
points in a dispute. International professional organizations
continue to debate what 'competency'
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means. Current information can be obtained from professional
associations such as the Association for
Conflict Resolution.
Mediation as a method of dispute resolution
In the field to resolving legal controversies, mediation is an
informal method of dispute resolution, in
which a neutral third party, the mediator, attempts to assist
the parties in finding resolution to their
problem through the mediation process. Although mediation has no
legal standing per se,
agreements
between the parties can (usually with assistance from legal
counsel) be committed to writing and signed,
thus rendering a legally binding contract in some jurisdiction
specified therein.
Mediation differs from most other conflict resolution processes
by virtue of its simplicity, and the clarity
of its rules. It is employed at all scales from petty civil
disputes to global peace talks. It is thus difficult
to characterize it independently of these scales or specific
jurisdictions - where 'Mediation' may in fact
be formally defined and may in fact require specific licenses.
There are more specific processes (such as
peace process or binding arbitration or mindful mediation)
referred to directly in the text.
Safety, fairness, closure
These broader political methods usually focus on conciliation,
preventing future problems, rather than
on focused dispute-resolution of one matter.
Mediation can be reasonably seen as the simplest of many such
processes, where there is no great
dispute about political context, jurisdiction has been agreed,
whatever process selected the mediator is
not in doubt, and there is no great fear that safety, fairness
and closure guarantees will be violated by
future bad-faith actions.
If some warranty of safety, fairness, and closure can be
assumed, then the process can reasonably be
called 'mediation proper', and be described thus:
Mediation with arbitration
Mediation has sometimes been utilized to good effect when
coupled with arbitration, particularly
binding arbitration, in a process called
'mediation/arbitration'. In this process, if parties are unable to
reach resolution through mediation, the mediator becomes an
arbitrator, shifting the mediation process
into an arbitral one, seeking additional evidence as needed
(particularly from witnesses, if any, since
witnesses are normally not called upon by a mediator), and
finally rendering an arbitral decision.
This process is more appropriate in civil matters where rules of
evidence or jurisdiction are not in
dispute. It resembles, in some respects, criminal
plea-bargaining and Confucian judicial procedure,
wherein the judge also plays the role of prosecutor - rendering
what, in Western European court
procedures, would be considered an arbitral (even 'arbitrary')
decision.
Mediation/arbitration hybrids can pose significant ethical and
process problems for mediators. Many of
the options and successes of mediation relate to the mediator's
unique role as someone who wields
coercive power over neither the parties nor the outcome. If
parties in a mediation are aware the mediator
might later need to act in the role of judge, the process could
be dramatically distorted. Thankfully,
mediation-arbitration often involves using different individuals
in the role of mediator and (if needed
later) arbitrator, but this is not always the case.
Mediator liability
The role of mediator is less controversial than the role of
judge, if only because a mediator may only
propose, rather than impose, a contract.
The assumed moral or legal responsibility, or even liability, of
the mediator differs drastically in
different methods - for instance, in global political
negotiations, it is often difficult to find anyone who
is sufficiently trusted by both sides to even get a peace
process to begin. Accordingly, liability is not
assigned to the mediator no matter how badly things go wrong -
doing so would discourage future
efforts to help.
Global relevance
The rise of international trade law, continental trading blocs,
the World Trade Organization (and its
opposing anti-globalization movement), use of the Internet,
among other factors, seem to suggest that
legal complexity has started to reach to an intolerable and
undesirable point. There may be no obvious
way to determine which jurisdiction has precedence over which
other, and there may be substantial
resistance to settling a matter in any one place.
Accordingly, mediation may come into more widespread use,
replacing formal legal and judicial
processes sanctified by nation-states. Some, like the
anti-globalization movement, believe such formal
processes have quite thoroughly failed to provide real safety
and closure guarantees that are prerequisite
to uniform rule of law.
Following an increasing awareness of the process, and a wider
notion of its main aspects and eventual
effects, mediation is in recent times frequently proposed as a
form of resolution of international
disputes, with attention to belligerent situations too.
However, as mediation ordinarily needs to be required by the
interested parties and it would be very
difficult to impose it, in case one of the parts refuses this
process it cannot be a solution.
Fairness
As noted, mediation can only take place in an atmosphere where
there is some agreement on safety,
fairness and closure, usually provided by nation-states and
their legal systems. But increasingly disputes
transcend those borders and include many parties who may be in
unequal-power relationships.
In such circumstances, with many parties afraid to be identified
or to make formal complaints,
terminology or rules of standing or evidence slanted against
some groups, and without power to enforce
even "legally binding" contracts, some conclude that the process
of mediation would not reasonably be
said to be 'fair'.
Accordingly, even when it is offered and attempts are made to
make it fair, mediation itself might not be
a fair process, and other means might be pursued.
From a more technical point of view, however, one must recall
that the mediation must be required by
the parties, and very seldom can it be imposed by "non-parties"
upon the parties. Therefore, in presence
of entities that cannot be clearly identified, and that
practically don't claim for their recognition as
"parties", the professional experience of a mediator could only
apply to a proposal of definition, that
besides would always miss the constitutional elements of a
mediation. Moreover, in such circumstances,
the counter-party of these eventual entities would very likely
deny any prestige of 'party' to the
opponent, this not consenting any kind of treaty (in a correct
mediation).
More generally, given that mediation ordinarily produces
agreements containing elements to enforce the
pacts with facts that can grant its effectiveness, note that the
legal system is not the only means that will
ensure protection of the pacts: modern mediation frequently
tends to define economical compensations
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and warranties too, generally considered quicker and more
effective. The concrete 'power' of an
agreement is classically found in the
equilibre of the pact, in the
sincere conciliation of respective
interests and in the inclusion of measures that would make the
rupture of the pact very little convenient
for the unfaithful party. Pacts that don't have such sufficient
warranties are only ally effects of
a mediation, but would never respect the deontology of the
mediator.
Arbitration
Arbitration is a form of mediation or conciliation, where the
mediating party is given power by the
disputant parties to settle the dispute by making a finding. In
practice arbitration is generally used as a
substitute for judicial systems, particularly when the judicial
processes are viewed as too slow,
expensive or biased. Arbitration is also used by communities
which lack formal law, as a substitute for
formal law.
Commercial and other forms of contract arbitration
Agreements to arbitrate were not enforceable at common law,
though an arbitrator's judgment was
usually enforceable (once the parties had already submitted the
case to him or her). During the Industrial
Revolution, this situation became intolerable for large
corporations. They argued that too many valuable
business relationships were being destroyed through years of
expensive adversarial litigation, in courts
whose strange rules differed significantly from the informal
norms and conventions of businesspeople
(the private law of commerce, or
jus merchant). Arbitration appeared
to be faster, less adversarial, and
cheaper.
The result was the New York Arbitration Act of 1920, followed by
the United States Arbitration Act of
1925. The USAA is now known as the Federal Arbitration Act.
Thanks to the subsequent judicial
expansion of the meaning of interstate commerce, the U.S.
Supreme Court reinterpreted the FAA in a
series of cases in the 1980s and 1990s to cover the full scope
of interstate commerce. In the process, the
Court held that the FAA preempted many state laws covering
arbitration, some of which had been
passed by state legislatures to protect their consumers against
powerful corporations.
Since commercial arbitration is based upon either contract law
or the law of treaties, the agreement
between the parties to submit their dispute to arbitration is a
legally binding contract. All arbitral
decisions are considered to be "final and binding." This does
not, however, void the requirements of
law. Any dispute not excluded from arbitration by virtue of law
(e.g. criminal proceedings) may be
submitted to arbitration.
Other forms of contract arbitration
Arbitration can be carried out between private individuals,
between states, or between states and private
individuals. In the case of arbitration between states, or
between states and individuals, the Permanent
Court of Arbitration (Hague Tribunal) and the International
Center for the Settlement of Investment
Disputes (ICSID) (an institution of the World Bank Group) are
the predominant organizations.
Arbitration is also used as part of the dispute settlement
process under the WTO Dispute Settlement
Understanding. International arbitral bodies for cases between
private persons also exist, the
International Chamber of Commerce Court of Arbitration being the
most important. The American
Arbitration Association is a popular arbitral body in the United
States. The National Arbitration Forum
is another leading arbitration provider in the United States.
Arbitration also exists in international sport
through the Court of Arbitration for Sport.
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A growing trend among employers whose employees are not
represented by a labor union is to establish
an organizational problem-solving process, the final step of
which consists of arbitration of the issue at
point by an independent arbitrator, to resolve employee
complaints concerning application of employer
policies or claims of employee misconduct. Employers in the
United States have also embraced
arbitration as an alternative to litigation of employees'
statutory claims, e.g., claims of discrimination,
and common law claims, e.g., claims of defamation. Currently
found in open Brazillian markets and
misc. benches.
Labor arbitration
Arbitration has also been used as a means of resolving labor
disputes for more than a century. Labor
organizations in the United States, such as the National Labor
Union, called for arbitration as early as
1866 as an alternative to strikes to resolve disputes over the
wages, benefits and other rights that
workers would enjoy. Governments have also relied on arbitration
to resolve particularly large labor
disputes, such as the Coal Strike of 1902.
This type of arbitration is commonly known as interest
arbitration, since it involves the mediation of the
disputing parties' demands, rather than the disposition of a
claim in the manner a court would act.
Interest arbitration is still frequently used in the
construction industry to resolve collective bargaining
disputes. The United Steelworkers of America adopted an
elaborate form of interest arbitration, known
as the Experimental Negotiating Agreement, in the 1970s as a
means of avoiding the long and costly
strikes that had made the industry vulnerable to foreign
competition. Major League Baseball uses a
variant of interest arbitration, in which an arbitrator chooses
between the two sides' final offers, to set
the terms for contracts for players who are not eligible for
free agency.
Unions and employers have also employed arbitration to resolve
employee grievances arising under a
collective bargaining agreement. The Amalgamated Clothing
Workers of America made arbitration a
central element of the
Protocol of Peace it negotiated
with garment manufacturers in the second decade
of the twentieth century. Grievance arbitration became even more
popular during World War II, when
most unions had adopted a no-strike pledge. The War Labor Board,
which attempted to mediate disputes
over contract terms, pressed for inclusion of grievance
arbitration in collective bargaining agreements.
The Supreme Court subsequently made labor arbitration a key
aspect of federal labor policy in three
cases which came to be known as the Steelworkers' Trilogy. The
Court held that grievance arbitration
was a preferred dispute resolution technique and that courts
could not overturn arbitrator's awards unless
the arbitrator exceeded his or her authority, engaged in fraud
or corruption, or violated basic due
process.
Securities arbitration
In the United States securities industry, arbitration has long
been the preferred method of resolving
disputes between brokerage firms, and between firms and their
customers. The securities industry uses a
pre-dispute arbitration agreement, where the parties agree to
arbitrate their disputes before any such
dispute arises. Those agreements were upheld by the United
States Supreme Court in Shearson v.
MacMahon, 482 U.S. 220 (1987) and today nearly all disputes
involving brokerage firms are resolved in
arbitration.
The process operates under its own rules, and is described in an
article Introduction to Securities
Arbitration. Securities arbitrations are held primarily by the
NASD Dispute Resolution program and the
New York Stock Exchange.
Judicial arbitration
Some state court systems have promulgated court-ordered
arbitration; family law (particularly child
custody) is the most prominent example. Judicial arbitration is
often merely advisory dispute resolution
technique, serving as the first step toward resolution, but not
binding either side and allowing for trial de
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novo. Litigation attorneys present their side of the case to an
independent teritary lawyer, who issues an
opinion on settlement. Should the parties in question decide to
continue to dispute resolution process,
there can be some sanctions imposed from the initial arbitration
per terms of the contract.
Proceedings
Various bodies of rules have been developed that can be used for
arbitration proceedings. The two most
important are the UNCITRAL (United Nations Commission on
International Trade Law) rules (Model
Law) and the ICSID rules. The rules to be followed by the
arbitrator are specified by the agreement
establishing the arbitration.
The Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (Done at New York,
10 June 1958; Entered into force, 7 June 1959; 330 U.N.T.S. 38,
1959) provides for the enforcement of
foreign arbitral awards on the territory of the contracting
parties. Similar provisions are contained in the
earlier Convention on the Execution of Foreign Arbitral Awards
(Done at Geneva, 26 September 1927;
Entered into force, 25 July 1929; L.N.T.S. ???).
Some jurisdictions have instituted a limited grace period during
which an arbitral decision may be
appealed against, but after which there can be no appeal. In the
case of arbitration under international
law, a right of appeal does not in general exist, although one
may be provided for by the arbitration
agreement, provided a court exists capable of hearing the
appeal.
When arbitration occurs under U.S. law, either party to an
arbitration may appeal from the arbitrator's
decision to a court, however the court will generally not change
the arbitrator's findings of fact but will
decide only whether the arbitrator was guilty of malfeasance, or
whether the arbitrator exceeded the
limits of his or her authority in the arbitral award or whether
the award conflicts with positive law. The
Supreme Court has described the standard of review as one of the
narrowest known to Western
jurisprudence.
Arbitrators
Arbitrators are not bound by precedent and have great leeway in
such matters as active participation in
the proceedings, accepting evidence, questioning witnesses, and
deciding appropriate remedies.
Arbitrators may visit sites outside the hearing room, call
expert witnesses, seek out additional evidence,
decide whether the parties may be represented by legal counsel,
and perform many other actions not
normally within the purview of a court. It is this great
flexibility of action, combined with costs usually
far below those of traditional litigation, which makes
arbitration so attractive.
Arbitrators have wide latitude in crafting remedies in the
arbitral decision, with the only real limitation
being that they may not exceed the limits of their authority in
their award. An example of exceeding
arbitral authority might be awarding one party to a dispute the
personal automobile of the other party
when the dispute concerns the specific performance of a
business-related contract.
It is open to the parties to restrict the possible awards that
the abitrator can make. If this restriction
requires a straight choice between the position of one party or
the position of the other, then it is known
as pendulum
arbitration or final offer
arbitration. It is designed to encourage the parties to moderate
their initial positions so as to make it more likely they
receive a favourable decision.
No definitive statement can be made concerning the credentials
or experience levels of arbitrators,
although some jurisdictions have elected to establish standards
for arbitrators in certain fields. Several
independent organizations, such as the American Arbitration
Association, offer arbitrator training
programs and thus in effect, credentials. Generally speaking,
however, the credibility of an arbitrator
rests upon reputation, experience level in arbitrating
particular issues, or expertise/experience in a
particular field. Arbitrators are generally not required to be
members of the legal profession.
To ensure effective arbitration and to increase the general
credibility of the arbitral process, arbitrators
will sometimes sit as a panel, usually consisting of three
arbitrators. Often the three consist of an expert
in the legal area within which the dispute falls (such as
contract law in the case of a dispute over the
terms and conditions of a contract), an expert in the industry
within which the dispute falls (such as the
construction industry, in the case of a dispute between a
homeowner and his general contractor), and an
experienced arbitrator.
Exchange rate systems:
Exchange rate is the price of one country’s currency in terms of
another country’s currency. Three types
of exchange rate systems are give in the following;
Fixed exchange
rate system (the exchange rate
is fixed)
Flexible
(floating) exchange rate system
(the exchange rate is determined by market forces
and changes freely)
Managed exchange
rate system (the exchange rates
are allowed to move only within limits -
if the exchange rate is moving out of the desired limit then
central banks buy or sell the
currencies to control the exchange rate)
Pros and Cons of Fixed & Flexible Exchange-Rate Systems
Fixed and flexible exchange rate systems have their pros and
cons that are listed below;
• Fixed
exchange-rate system
– reduce
riskiness of international trade
– important
anti-inflationary tool
– wide swings in
the values of key currencies can disrupt sound international investment decision
making
• Flexible
exchange-rate system
– with BOP
equilibrium, domestic policy makers can concentrate on domestic economy
– represent true
state of economy
Factors influencing exchange-rates:
Business in international markets are strongly affected by
exchange rates of host and home countries’
currencies as well as with other exchange rates. The major
factors that affect exchange rates are
discussed in the following;
• Capital controls
on any foreign currency would often work to increase its exchange rate as its
trading
gets restricted.
• Higher
exchange-rate spreads (difference between buying and selling rate of a currency)
allows more
flexibility to buyers and sellers to change exchange rates.
• Strong
balance-of-payments statistics of any country affect that country’s currency to
strengthen.
• Higher
foreign-exchange reserves of any country influence that currency of that country
to appreciate
in value.
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• Direction and
strength of economic growth any country also affects its currency’s exchange
rates.
• Government
spending increases money in circulation and also affects growth ot certain
sectors of a
country’s economy and may also affect exchange rates.
• Relative
inflation rates (purchasing
power parity - higher relative inflation leads to lower purchasing
power of currency & hence lower exchange value) also affect
exchange rates with pressure on the
currency of the country with higher inflation to depreciate
overtime.
• Large
money-supply growth increases inflation and accordingly affects the value of a
country’s
currency.
• Interest-rate
differentials (investors will
arbitrage to keep exchange rates in equilibrium) also work
like the relative inflation rates in affecting the currency of a
country.
• Trends in
exchange-rate movements also impact the direction of exchange rate movements,
at-least
in near-term future.
• In time of
economic turmoil in the regains of the world investors move their capital in the
currencies
that are strong (safe haven) and with increasing demand their
exchange rates may increase.
• Technical factors
(i.e. seasonal, release of statistical data) also affect exchange rates in
near-term.
Business implications of exchange rates:
Changes in exchange rates of international currencies impact
business decisions in many ways. Some of
the common implications of changing exchange rates are discussed
below;
Marketing Decisions
– Changes in
exchange rates affect demand for products (home & abroad)
– Marketer may need
to change prices of products and services
Production Decisions
– Changes in
exchange rates may affect production costs in various countries
Financial Decisions
– Changes in
exchange rates affect sourcing of funds by firms
– Also affect
cross-border remittances of funds
– and reporting of
financial results into home country accounts
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