5. The foreign exchange market

A major distinction between domestic and international transactions for goods and services is that one currency is used for domestic transactions but more than one currency is used for international transactions.

The foreign exchange market is a central part of international business. It is a mechanism through which transactions can be made between one country’s currency and another’s. The most common location for foreign exchange transactions is a commercial bank.

The foreign exchange market is based on the economic law of supply and demand. Governments often intervene to control the flow of currency by buying or selling currency in the open market. Trading between banks is called the interbank market. This market exists to protect the banks against foreign-exchange risk.

Foreign exchange is not simply currency printed by a foreign country’s central bank; it includes such items as cash, checks, wire transfers, telephone transfers and even contracts to sell or buy currency in the future. Foreign exchange is really any financial instrument that carries out payment from one currency to another.

The most common form of foreign exchange in transactions between companies is the draft. The most common form of foreign exchange in transactions between banks is the telephone transfer.

The rate at which one currency trade for another currency on the foreign exchange market is determined by government choice in each country. If a country has been running a balance of trade deficit, it may be able to reduce the deficit by having the central bank buy foreign currency in the open market. Businesses that are involved in international trade are interested in changes in the exchange rate because they will affect the prices paid for imports and exports. S falling exchange rate will help exporters as it will make their goods cheaper overseas. It will make imported goods more expensive. A rising exchange rate will help importers as it will lower the price of imported goods. But exporters will face rising prices for their goods.

Exchange risk is a very real concern for financial managers. Protection against exchange rate variations is possible through many kinds of hedging strategies.

6. Export and import strategy

The international economic transactions involve merchandise exports and imports. In the area of exports and imports there is a huge variety of participants, ranging from the exporter and importer all the way to transportation companies, insurers, and banks.

Exporting or importing is a type of international business open to any size or kind of firm, whereas other types of international activity, such as foreign direct investment, tend to demand greater capital, management time, and other company resources.

Like FDI, exporting can be viewed as a means of foreign market entry. Exporting can be selected to achieve least-cost supply for the foreign market, or to reduce the risk of having all sales in one country, or to establish a base for further production.

Domestic firms can utilize exports both to absorb products that cannot be sold-locally and to expand business in new markets.

Importing is an often neglected part of international trade strategy. Any firm may find that it can obtain production inputs from abroad more cheaply or when suppliers are not available locally. Also by using foreign suppliers a firm can diversity' its suppliers and avoid dependence on local firms only.

A "typical" export-import transaction would probably take place as follows. First, the exporter would look for a foreign buyer for its products. When the exporter finds a buyer - the transaction can proceed. The two firms negotiate for terms, such as the price, the quantity to be delivered, the delivery dale, and the payment date. When an agreement is reached, some kind of bill of sale can be drawn up, depending on what two parties determine. The negotiations will probably include a demand by the exporter to have some guarantee of payment made on the importer's behalf- for example, a letter of credit from a bank that the exporter chooses.

In addition to the payment documents, the transaction usually involves an insurance contract on the goods shipped and a contract with some transportation company to ship the goods from the exporter to customs in the importer's country.