Global Financing – Hard and Soft money
Global financing and exchange rates are major topics when considering a venturing business oversea. In the proceeding I will explain in detail what hard and soft currencies are. I will then go into detail explaining the reasoning for the fluctuating currencies. Finally I will explain hard and soft currencies importance in managing risks.
Hard money is usually from a highly industrialized country that is widely accepted around the world as a form of payment for goods and sets. A hard money is expected to keep comparatively stable by a short period of time, and to be highly liquid in the forex market. Another criterion for a hard money is that the money must come from a politically and economically stable country. The U.S. dollar and the British pound are good examples of hard currencies (Investopedia,2008). Hard money basically method that the money is strong. The terms strong and ineffective, rising and falling, strengthening and weakening are relative terms in the world of foreign exchange (sometimes referred to as “forex”). Rising and falling, strengthening and weakening all indicate a relative change in position from a past level. When the dollar is “strengthening,” its value is rising in relation to one or more other currencies. A strong dollar will buy more units of a foreign money than before. One consequence of a stronger dollar is that the prices of foreign goods and sets drop for U.S. consumers. This may allow Americans to take the long-postponed vacation to another country, or buy a foreign car that used to be too expensive. U.S. consumers’ assistance from a strong dollar, but U.S. exporters is hurt. A strong dollar method that it takes more of a foreign money to buy U.S. dollars. U.S. goods and sets become more expensive for foreign consumers who, as a consequence, tend to buy fewer U.S. products. Because it takes more of a foreign money to buy strong dollars, products priced in dollars are more expensive when sold overseas (chicagofed,2008).
Soft money is another name for “ineffective money”. The values of soft currencies fluctuate often, and other countries do not want to keep up these currencies due to political or economic uncertainty within the country with the soft money. Currencies from most developing countries are considered to be soft currencies. Often, governments from these developing countries will set unrealistically high exchange rates, pegging their money to a money such as the U.S. dollar (invest words,2008). Soft money breaks down to the money being very ineffective, an example of this would be the Mexican peso. A ineffective dollar also hurts some people and benefits others. When the value of the dollar falls or weakens in relation to another money, prices of goods and sets from that country rise for U.S. consumers. It takes more dollars to buy the same amount of foreign money to buy goods and sets. That method U.S. consumers and U.S. companies that import products have reduced purchasing strength. At the same time, a ineffective dollar method prices for U.S. products fall in foreign markets, benefiting U.S. exporters and foreign consumers. With a ineffective dollar, it takes fewer units of foreign money to buy the right amount of dollars to buy U.S. goods. As a consequence, consumers in other countries can buy U.S. products with less money.
Many things can contribute to the fluctuation of money. A few are as follows for strong and ineffective money:
Factors Contributing to a Strong money
Higher interest rates in home country than oversea
Lower rates of inflation
A domestic trade surplus relative to other countries
A large, consistent government deficit crowding out domestic borrowing
Political or military unrest in other countries
A strong domestic financial market
Strong domestic economy/weaker foreign economies
No record of default on government debt
Sound monetary policy aimed at price stability.
Factors Contributing to a ineffective money
Lower interest rates in home country than oversea
Higher rates of inflation
A domestic trade deficit relative to other countries
A consistent government surplus
Relative political/military stability in other countries
A collapsing domestic financial market
ineffective domestic economy/stronger foreign economies
Frequent or recent default on government debt
Monetary policy that frequently changes objectives
Importance on managing risk
When venturing oversea there are many risk factors that must be addressed, and keeping these factors in check is crucial to a companies success. Economic risk can be broadly summarized as a series of macroeconomic events that might impair the enjoyment of expected earnings of any investment. Some analysts further part economic risk into financial factors (those factors leading to inconvertibility of currencies, such as foreign indebtedness or current account deficits and so forth) and economic factors (factors such as government finances, inflation, and other economic factors that may rule to higher and sudden taxation or desperate government imposed restrictions on foreign investors’ or creditors’ rights). Altagroup,2008. The decisions of businesses to invest in another country can have a meaningful effect on their domestic economy. In the case of the U.S., the desire of foreign investors to keep up dollar-denominated assets helped finance the U.S. government’s large budget deficit and supplied funds to private credit markets. According to the laws of supply and need, an increased supply of funds – in this case funds provided by other countries – tends to lower the price of those funds. The price of funds is the interest rate. The increase in the supply of funds extended by foreign investors helped finance the budget deficit and helped keep interest rates below what they would have been without foreign capital. A strong money can have both a positive and a negative impact on a nation’s economy. The same holds true for a ineffective money. Currencies that are too strong or too ineffective not only affect individual economies, but tend to distort international trade and economic and political decisions worldwide.
Hard money is usually from a highly industrialized country that is widely accepted around the world as a form of payment for goods and sets. A hard money is expected to keep comparatively stable by a short period of time, and to be highly liquid in the forex market. Soft money is another name for “ineffective money”. The values of soft currencies fluctuate often, and other countries do not want to keep up these currencies due to political or economic uncertainty within the country with the soft money. Many things can contribute to the fluctuation of money; a few of these things are inflation, strong financial market, and political or military unrest. The decisions of businesses to invest in another country can have a meaningful effect on their domestic economy. In the case of the U.S., the desire of foreign investors to keep up dollar-denominated assets helped finance the U.S. government’s large budget deficit and supplied funds to private credit markets.