Answer 1
Spot and forward market
Foreign exchange rate is the means of expressing the worth and the value of the economy by the value of its currency by the value of another one. The normal market usage is to in quoting the exchange rate to spot value. It, therefore, means that for spot date, the delivery for two business days from the trade date, the payment is always done two days after delivery except for Canada versus US where it is two days. The two business days are usually essential in order to allow the trade information between the counterparties involved being agreed upon and also to process the funds via the local clearing systems. The payments are always done on the same date regardless of the time difference. The spot exchange rate is usually done in either of the currency. It means that either of the two currencies can be used as the base currency. Therefore understanding the currency values is essential.
It is worth understanding the rate of understanding of the two currencies between the dealer country and the client country. Therefore, for any global company, it is worth realizing the two currencies how they operate. The dealer requires to understand the home currency versus the other country exchange rate. If the currency rates are USD/JPY=108.80, USD/CAD=1.0836, EUR/USD=1.3036, it, therefore, means that the one unit of the currency is worth the indicated amount of the other country. Hence, if a dealer understands well how the spot currency operates, he or she would be in a better position to procure the business operations with ease. When dealing with the auto parts, the dealer would know the right pricing of the items in a competitive way. The rate of the currency exchange is the determiner of the rate at which these imports of the auto parts would be done.
After understanding the spot currency, the risks involved in foreign exchange rates can be avoided since the dealer has some tie to determine the rate at which to purchase and sell the items. He or she should allow some time for adjustments of the same. For the forward market, the operations are much like those of the spot except that the date is different from that of the spot. The forward market dates extend into the future far much than those of the spot. For instance, it may extend to even more than six months. It, therefore, gives the dealer a more time to understand the foreign market exchange rates. With this time frame, the dealer is in a position to have time to observe the rate of change and predict how the market operations may operate. The spot exchange rate would, therefore, be used as a way of understanding the forward market.
Sink spot has a slightly less time; it means that, understanding the spot currency would give an insight of the forward. For the forward market, it is, therefore, worth understanding that the transactions are carried out today for the payments to be done in the future. Therefore, the speculated date would have to be honored for the transaction to be viable at all times. The currency exchange rate would hence be used as a determiner in the calculation of the pricing of the commodities in by the dealers.
Answer 2
Financial transaction is the movement, communication or agreement that is carried out between the seller and buyer for the reason of exchanging an asset for payment. It can be referred to as a levy that is placed on certain monetary transaction designated for a particular purpose. This concept has always been associated with the financial sector. Consumption tax is never levied to this transaction. The buyer and the seller be in this case are separate entities that are involved in a transaction that engages exchange of goods, services, money or even information. Therefore, it is a transaction that involves the exchange of goods at one time and money at another.
Most of the transactions that happen nowadays are international. Therefore, the companies involved ought to try to understand the different financial situations in different countries of interest. This calls upon understanding the foreign exchange rates between the currencies of the nations. Globalization has taken place in all spheres of life and especially in trade. It, therefore, means that the company requires to try to understand the balance of payment between the two nations. In the process of market and transaction analysis, there emerges a number of advantages and disadvantages. These the factors require to be analyzed at any one time to understand the financial situation of the two nations.Bermuda is a capitalist economy. Therefore, this means that the economy is controlled by the government. Hence, working in such an economy means that the sellers will have to adhere to the terms and conditions set by the government.
There are advantages that are associated with such an economy. The cost of raw materials cannot be so high for the producers to afford them since the cost is controlled by the government. The government would not let the cost escalate to high levels in order to avoid very high prices. Another advantage is that in the market, there are many buyers and, therefore, there is a ready market for the products. It, therefore, means that the rate of transaction in this case is such that the rate of earning the profits is high. Any financial transaction taking place here would, therefore, be profitable. The disadvantage in this place is that the government may set a price ceiling so low that the producers are unable to recover their costs fully. It is, therefore, a disadvantage to the producer who might run at a loss.
In Luxembourg, the situation is a bit different from that in Bermuda in that the government does not have a direct control to the financial transactions. It, therefore, means that any business operating here has some added advantage in the setting of prices and on what to sell. The sellers can, therefore, make more profits at the same time. The disadvantage is that the sellers of factors of production may sell them at a very high cost such that the producers are unable to afford them. At the same time, the producers may incur very high costs thus selling their products at a very high cost and thus rendering them unaffordable to the consumers. Therefore, this makes that seller try to avoid the unprecedented losses.
Having all these factors, pros and cons in mind, my recommendation to the Chief Finance Officer would be to set up a food company in Luxembourg. In this state, the producers have the freedom to choose and set their own prices for the food products that they produce. Since government interference in price setting is minimal and restricted, the company would probably perform better in Luxembourg, and earn more profits. Unlike in Bermuda where the government gets to decide the prices of sales and raw materials, producers in Luxembourg have the freedom of setting their prices and charging what they wish for their prices. In a food company, the business would perform better if given the freedom to choose their own prices. The freedom gives the companies space to fully recover their costs of production, as well as add on their profits from the country. The currency that trades in Bermuda is the Bermuda dollar. In Luxembourg, the Euro is the home currency. The income from the two countries will also be a big determiner in the advice to the Chief Finance Officer. In the excel sheet attached, a breakdown and comparison in earnings is done.
References
Committee., G. B., & Lords., G. B. (2012). Towards a financial transaction tax? : 29th report of session 2010-12. London : Stationery Office.
Jane, A. G. (2013). Export markets. New York: Jayne Publishers.
Johnston, R. B., Swinburne, M., & Fund, I. M. (1999). Exchange rate arrangements and currency convertibility : developments and issues. Washington, DC : Washington.
Matheson, T. (2011). Taxing Financial Transactions. Washington : International Monetary Fund.
