Managing Operating Exposure. The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs and to be pre-positioned to react most appropriately. How can this task be accomplished in a multinational company?
Parity refers to the exchange rate between the two nations that make the purchasing power of the currencies equal. Countries set their exchange rates at a certain level to maintain economic changes. Adjustments in parity conditions occur naturally when exchange rates are allowed to fluctuate in the marketplace (Moosa & Bhatti, 2016). Managers are supposed to understand concepts of parity conditions and note when disequilibrium occurs to prepare for the changes.
Interest rate parity is determined by the expected future spot rate and relative interest rates (Jones, 2019). The information about changes in the interest parity is available from the stock exchange corporations and on the websites. Thus, managers can regularly check updated information about the parity condition to determine its random behavior and predict future trends. For instance, the forward exchange rate is essential in predicting the future spot exchange rate. Thus, managers should implement the strategy when the market is informational sufficient and the risk of premium low to make unbiased predictions.
Another significant condition is purchasing power parities (PPP). Moosa and Bhatti (2016) indicated that PPP refers to a situation where the price of goods and services equalize over time between countries. Disequilibrium in PPP occurs due to international trade barriers such as tariffs and high customs duties. Moosa and Bhatti (2016) outlined that disequilibrium can also result when individuals between the two countries have different tastes and preferences. Understanding changes in PPP enable managers to formulate strategies to curb the disequilibrium effects on the multinational organization. For instance, disequilibrium can affect competition such that companies situated in countries where their currency appreciated have a competitive advantage. Recognition of the behavioral changes of the conditions can help managers to plan on how to mitigate the global competition.
Jones, G. (2019). Purchasing power parity. Retrieved from https://www.economicsonline.co.uk/Global_economics/Purchasing_power_parity.html
Moosa, I. A., & Bhatti, R. H. (2016). International parity conditions: Theory, econometric testing, and empirical evidence. New York: St. Martin's Press
by EssayRoyal, Dec. 8, 2019, 6:17 p.m.