Choose a country (not the United States or Canada) . Then, identify some politic

Question

Choose a country (not the United States or Canada) . Then, identify some political and currency risks of that country and discuss why a U.S. company would invest (for example, build a factory) in that country. Also discuss some of the various international finance topics such as the foreign exchange market, purchasing power parity, interest rate parity, cross rates, and so on. Why is it important for international firms to understand these concepts?

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Explanation / Answer

For an industry to set up it needs lot of factors to look at;

availability of raw materials:

you consider dell for example ,its laptop parts are of different countries, battery from one place, laptop body from one place, and finally they assemble them and sell them.

the reason is that the relative cost of production.where there is abundant availability of raw materials, there they manufacture goods for cheap as there would be high competition in their own market.this is fetching for developed countries like america, as it's dollar's value is high compared to the currencies of rest of the countries.where you can call it as the foreign exchange rate and the so called purchasing power parity are the factors that determine the relative cost advantage.

As you know america being a developed country ; most of the developing countries invite them for establishing their companies in their own country. this is known as Foreign Development Index, as this would be helpful for the company to extend it's market in the global economy;and also helpful to the inviting country as it would provide more employment oppurtunities to their country,there by increasing the GDP of their country.

For example, if an exchange rate between the Euro and the Japanese Yen was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the euro or the yen is the standard currency of the U.S. However, if the exchange rate between the euro and the U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency.

Currencies are traded in fixed contract sizes, specifically called lot sizes, or multiples thereof. The standard lot size is 100,000 units of the base currency. Many retail trading firms also offer 10,000-unit (mini lot) trading accounts and a few even 1,000-unit (micro lot).

The officially quoted rate is a spot price. In a trading market however, currencies are offered for sale at an offering price (the ask price), and traders looking to buy a position seek to do so at their bid price, which is always lower or equal to the asking price. This price differential is known as the spread. For example, if the quotation of EUR/USD is 1.3607/1.3609, then the spread is USD 0.0002, or 2 pips. In general, markets with high liquidity exhibit smaller spreads than less frequently traded markets.

The spread offered to a retail customer with an account at a brokerage firm, rather than a large international forex market maker, is larger and varies between brokerages.

Example: consider EUR / USD currency pair EUR / USD

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