Impact of Fluctuating Rate on International Trade

Question: Discuss about the Impact of Fluctuating Rate on International Trade. Answer: Introduction To be able to carry out this research topic, it is very important for this research to define its topic. This research proposal defines foreign exchange as a comparison of one countrys currency vis a vis the other countries currency. For example we can compare one US dollar to one Indian Rupee. Due to the difference in economic developments of these two countries, it will be found that one currency is stronger than the other. Just to exemplify this, currently one US dollar is equal to about 100 Kshs. Due to globalization, the issue of foreign exchange rates has trickled down to the essence of international trade. Foreign has therefore become a tool to establish the prices of imported goods and services and the prices of exports in the international market. Apart from commodities, foreign exchange also affects the strength of various sectors when it comes to participation in the international market. Developing countries or emerging economies whose currencies are weaker compared to their developed counterparts have got it rough when it comes to international trade. For their prices to remain competitive in the international market, they use a lot of money locally to produce the goods. This means that at the end of the day they will have to fetch less profit due to the high competition when it comes to fixing the selling price of the goods. When importing too, the developing or emerging economies use a lot of money to import the products that they cannot produce. This in turn makes the imported products to appear very expensive for the locals hence discouraging import trade. This makes the countries to export more so as to get less import which is supposedly equal to the exports. This has always been making the developing countries to suffer from imbalance of trade deficit. Due to the impact of globalization the business has no boundary, it crosses across the border. Moreover, as different countries have their own currencies their and own valuations thus, money exchange across the border play important role in international business (Grimwade, 2000). However, the exchange rates among different currencies do not remain same all the time but it varies time to time due to several factors. The fluctuation of different currencies impact on the international business deals and thus, it has been taken as prospective research topic for this research proposal. Background of research The initiation of the international trade has been in existence from ancient age, and then barter method was the process of exchanging goods among the traders. Afterwards, in order to facilitate the business use of currencies begun. However, because of different various factor the exchange rate has been fluctuated in constant basis (International Crude Oil Trade, Year 2013, 2015). The economic performance of country, overall financial and business performance of the country, interest rate parity, inflation rate, and employment rate play significant role in the fluctuation of the currency price in foreign exchange market (Rosenberg, 2003). The fluctuation of FX Rate has significant impact on the business communities, specifically the companies playing in the international market means the exporters and the importers are mainly affected by the FX Rate fluctuations (International Refined Products Trade, Year 2014, 2015). The particular research is on the FX Rate fluctuation and its impa ct on the domestic businesses, which plays globally. Various nations of the world are endowed with various natural resources and not all nations have all they need for their development. To acquire what they do not have necessitated the introduction of international trade. Many goods are acquired from other countries by being imported from the countries where they are in plenty. Due to the extent of globalization there was need to adopt a common currency which would then be used in international trade. To this far, the US dollar has been the common currency being used in the international trade. Unfortunately, due to a single currency, any fluctuation in that currency would affect the entire global trade. This scenario was witnessed during the 2007-2008 economic inflation in the United States which was caused by speculation in the housing mortgages rates. The economic recession in the US then later spread to other economies of the world very fast due to the fact that the US dollar was being used as the common currency for international trade. Importation became expensive for the developing countries and exportation became cheaper. All in all, the goods at the international market appeared expensive since the raw materials imported to produce them were expensive. Many of the developing countries have suffered from this problem since their currencies against the American dollar have been weaker. This has made importation to be very expensive and exported products to attract prices that are not commensurate with the cost of production at the local country. On the contrary, developed countries which have got stronger currencies relative to US dollar have not been adversely affected. They are able to import and export goods and services at very competitive costs or prices. This research proposal seeks to identify how the fluctuation in the foreign currency has been affecting international trade. Problem statement International trade is the only platform where different countries can acquire what they do not produce and also sell what they produce and others do not. In this trade, there is a major element that influences the running of this trade. This is the common currency that used in the trade. The fluctuating rate of the US dollar against other currencies either affects trade positively or negatively. In case of the FX Rate swing in favour of the domestic currency then the rate of the domestic currency will be hiked, and then the exporters have to face severe loss because they got payment in foreign currency but they have to invest domestic currency in order to produce the product materials (Weithers, 2006). Therefore, good performances of the domestic currency fetch losses to the exporters, whereas the importers are benefitted by the good performance of the domestic currency as they have to pay in foreign currencies. On the other hand, in case of domestic currency provides bad performanc es then the exporters are benefitted and the importers have to face monetary losses. Since international trade is there to stay, this means that the global business will continue being affected by the fluctuating foreign exchange rates. Many researches have been done on the impact of variance of forex on international business to establish the extent of the effect of foreign exchange on international trade but a gap still exist on the major effects of foreign exchange rate on international business. It is for this reason that this research proposal seeks to identify the extent to which foreign exchange affects international trade. Research aim and objectives The research aim to detect the risks for the business occurs due to the volatility of FX rate. The main objective of this research is to determine the impact of foreign exchange rate fluctuation on international or global business. The specific research objectives were; To understand the factors, which are liable for the fluctuation of FX Rate To find out effective remedies so that the impact of currency fluctuations can be minimized. Research questions Q1: Is there any major impact of volatile nature of FX Market on the international market? Q2: What are the key factors of the volatility in the FX market? Q3. How the impact of the volatile FX Market on global organization can be restrained? Hypothesis Hypothesis of the research are as follows: H0: Volatile FX market has direct impact on the business organizations; specially, the organization doing business internationally. H1: Volatile FX market has not any direct impact on the business organizations Literature review The FX rate is prone to be volatile as there are different factors, which influence rate of foreign exchange. Difference in interest rate, difference in inflation, Current account scarcities, Public debt, term for trading along with the political stability and economic performance of the domestic country are the significant variables of FX market (Wystup, 2006). Because of the different variables the performances of the domestic currency in international market use to fluctuate (Ree, Yoon, Park, 2015). Moreover, the fluctuations of the domestic currency in the international market greatly influence the business of the business organization, especially, the organization, which has exposure in the international market. The profitability of the organization hugely varied because of the FX Rate fluctuations. Even for the FX rate fluctuation the organizations have to face severe monetary losses (Ree, Yoon, Park, 2012). The global players more specifically the firm involve in export or i mport business are mainly affected by the FX Rate fluctuations. A research study done by (Aliyu, 2011) recorded that any increase in foreign exchange led to a corresponding rise in the level of imports and on the other hand, a drop in the amounts of exports. On the contrary, they assert that any depreciation in the foreign exchange rate will make exports cheaper and imports expensive. This will go a long way in discouraging imports and encouraging imports. These two scenarios always lead to diversion of resources to either importing or exporting depending on the favorable side. The effect is wide as it also has an impact on economy of the exporting as well as the importing country. On the same breadth, in his research, (Hossain, 2002) concurs that globalization facilitates trade which in turn affects the amount of exports and imports of a given country. He adds that this also affects the balance of payment of various countries. Other researches done by (Levy Yeyati, 2003) concluded that those nations that have highly flexible forex rate achieve faster economic growth. In Nigeria, (Asher, 2012) did a research about the impact of exchange rate variation on the economy. According to his research findings of the study which spanned ten years, real forex rate did have a positive change on the progress of the economy. A correlation study was also done by (Akpan, 2008) to establish the relationship that exists between economic growth and foreign exchange trends. The results pointed out that there was a strong positive correlation between the two variables. This led to his research conclusion that in deed exchange rate liberalization impacted positively on the economy of Nigeria. (firoozi, 1997) confirmed that there is a correlation when it comes to forex volatility and foreign direct investment. (Duiker and Gorg, 2009) also established that forex between two countries is a core factor in evaluating the foreign direct investment in japan and china. In certain periods in japan, it is recorded that devaluating the foreign exchange in china leads to a positive foreign direct investment in japan. On the same note (Chong and Tan, 2008) also carried out a research on foreign exchange impact on investment and concluded that there is a very close relationship that exist in exchange rate volatility and macroeconomic aspects in the countries found in southeast Asia. There is a negative association between forex volatility on foreign direct investment among European Union countries to those in eastern Europe (Arratibel and Zdzienicka, 2011). (Baek and Okawa, 2001) studied that the strengthening of japanese yen relative to currencies in Asia and America leads to a rise i n foreign direct investment among the manufacturing industries in Asia. (Gorg and Wakelin, 2002) also asserts that direct investment is mostly affected by the volatility of the exchange rates in the united states of America since the common international trade currency is usually the American dollar. The various levels of economic growth which includes strengthening and weakening of the countrys currency has a major effect on the balance of trade of that particular country (Ling et al. 2008; Ibrahim et al. 2014). There have been attempts by some countries to use their own currencies to cause an foreign direct investment inflows from the countries that have less strong currencies (Bleaney and Greenaway, 2001). The key variables that influence the FX rate are, difference interest rate, inflation, interest rate parity, political stability economic performance of domestic nation etc. (Grieb, 2013). Operational definitions and measurement The companies doing business internationally must keep an eye on the FX market as the volatility in FX market can impact on the profitability of the business of these organizations (Reiswich Uwe, 2012). Good performances of the domestic currency fetch losses to the exporters, whereas the importers are benefitted by the good performance of the domestic currency (Kliatskova Mikkelsen, 2015). On the other hand, in case of domestic currency provides bad performances then the exporters are benefitted and the importers have to face monetary losses. Research methodology The quantitative research methodology will be applied in this research so that a widespread understanding can be achieved about FX market volatility (Ong Barkbu, 2010). The data that will be used in this study will be collected from secondary sources such as the International Monetary Fund (IMF) global economic growth quarterly releases and major stock exchange markets such as the New York stock exchange. The data will span from 2005 to 2015. The models that will be employed in this study which use economic indicators which are; inflation rates, GDP and exchange rates. To add on, the study will use multiple regression analysis to establish the effect of changes in forex on international trade. Also, ordinary least square estimation technique will also be used. The secondary research help in acquiring the basic ideas and the primary data help in accomplishing the research aim and objectives. Research design Descriptive design has been applied for the research for acquiring deep detail knowledge on the research topic. In any research, the design is usually the framework which directs the processes that are required so as to obtain the apt information that is needed for the research (Cooper Schindler, 2008). This study chooses to use descriptive research design. This type of research design is robust as it ensures exhaustful description of the data so as to make sure that there are no cases of bias in the process of data collection. In some instances inferential statistics will also be used to establish correlation and association between variables. This research study will majorly depend on secondary data. This data will be obtained from the IMF reports and economic journals published by the world bank. Data analysis The data obtained from the secondary sources will be summarised and organized for the purpose of analysis. Various analysis tools such as excel and statistical package for social sciences (SPSS) will be employed to analyse the data. Descriptive statistics such as mean, standard deviation, percentages, variances and so on will be obtained from descriptive statistics analysis. Inferential statistics such as test of significance will be used to make various decisions in hypothesis tests (Kothari , 2004). Dependent and independent variables Dependent variables are the variables than an individual wish to predict, estimate and what is affected when executing the experiment and things that is affected in the experiment. Independent Variable Independent variable is the variable that can be changed and one can control the variables (Rebonato Rebonato, 2004). Description of the expected results Going by the previous researches done on the impact of foreign exchange fluctuation on the global business, we can almost certainly say that the results will not be any different. Less developed countries are expected to experience unfavourable balance of trade due to their week currencies against the US dollar. Many countries will be found to cut on imports since they appear expensive for the local citizens. Exports will also go down but at the same time go down in countries that import raw materials to produce the exports. This in short means that the final conclusion of this research paper will be that fluctuation in foreign exchange rates indeed affects international business to a larger extent. Conclusion, interpretation, and recommendation As per the findings of the research process, the conclusions will be made and further recommendation be suggested to the relevant stakeholders in the economy so that they can have a better insight of the state of affairs when it comes to international trade and how the rate of foreign exchange rate affects whole process (Ree, Yoon, Park, 2015). Grantt chart for research activities from literature review to data analysis. ACTIVITIES WK 1 WK2 WK3 WK4 WK5 WK6 WK7 WK8 WK9 WK10 WK11 WK12 WK13 WK14 LITERATURE REVIEW XXX XXX XXX XXX XXX DATA COLLECTION XXX XXX XXX XXX XXX XXX XXX XXX XXX DATA ANALYSIS XXX XXX XXX XXX XXX XXX XXX XXX XXX FINAL RESEARCH XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX References International Crude Oil Trade . (2013). World Oil Trade,. Akpan, P. L. (2008). Foreign exchange market and economic growth in an emerging petroleum based economy: Evidence from Nigeria (1970-2003). African Economic and Business Review. Aliyu, S. R. (2011). Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation,. Research Journal of International Studies. Arratibel, O., Furceri, D., Martin, R. (2011). The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries. Economic Systems. Asher , O. J. (2012). The Impact of Exchange rate Fluctuation on the Nigeria Economic Growth (1980 2010). Baek, I. 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