The Economist Insider dealing
Article Title and Date of the Article The Economist “Insider dealing: euro outs fear that euro ins might do them down” October 17, 2015 Summary This article posted as a special news report by The Economist, is focused on the Eurozone and European Union, and how they are experiencing some problems that might hurt both the euro currency and relations with non-‐-‐-‐euro zone countries. At the moment, in Europe there are two types of observers: the Europhiles and Euroskeptics. The Europhiles are those who admire Europe and favor the participation of the European Union, while on the other side of the spectrum are the Euroskeptics, who are those who are opposed to increasing the powers of the European Union. Currently, the alarming political issue that has been growing in Europe is the negative relationship between those countries that belong to the European Union and Eurozone, against those who are members of the European Union but not the Eurozone. The argument here is that those members belonging to the Eurozone have been meeting together, while excluding non-‐-‐-‐Eurozone members and making decisions such as bails, which affect all countries within the European Union. The Eurozone countries believe that that only those countries that are members of the Eurozone should be allowed to voice their opinions and make decisions on everything regarding the euro, since they are the ones directly affected by it. On the other hand, the non-‐-‐-‐Eurozone countries feel like the euro members are “ganging up” on them, meaning that they feel like those countries in the Eurozone are making decisions regarding their own interests, and not the collective interests of all members of the European Union. Association to specific chapter material and concepts 2.4 A Single Currency for Europe: The Euro (40) Chapter 2 discusses the global financial environment including the European Union, the Eurozone and the impact of the Euro in the markets. 10.1 Types of Foreign Exchange Exposure (272) Chapter 10 introduces the various types of exposure to foreign currency fluctuations That firms face. Political problems as those seen from the article can cause major currency fluctuations in the euro exchange, which is a concern for companies conducting international business using euros.
Concepts Euro – A single new currency unit adopted by the 11 participating members of the European Union’s European Monetary System in January 1999, replacing their individual currencies. European Union – The official name of the former European Economic Community as of January 1, 1994. Eurozone – The countries that officially use the euro as their currency. Translation exposure – measures changes in the value of outstanding financial obligations incurred prior to a change in exchange rates but not due to be settled until after the exchange rates change. Thus, it deals with changes in cash flows that result from existing contractual obligations. Translation exposure – is the potential for accounting-‐derived changes in owner’s equity to occur because of the need to “translate” foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements. Operating exposure – also called economic exposure, competitive exposure, or strategic exposure, measures the change in the present value of the firm resulting from any change in future operating cash flows of the firm caused by an unexpected change in exchange rates. The change in value depends on the effect of the exchange rate change on future sales volume, prices, and costs. Currency risk – is the variance in expected cash flows arising from unexpected exchange rate changes.
Reasons for selection
The reason I chose this article is because it demonstrates how countries have to work together for an improved global environment. If they do not, they will experience greater problems in their economies, businesses, and investments both in the domestic and global markets. Additionally, chapters 10-‐-‐-‐18 cover extensively “foreign exchange risk management” and this article is a perfect example in which we can see the concepts we learn in class, be applied in the real world.
The issues discussed in the article have caused greater currency exposure in the global markets. Basically, the euro currency is suffering as foreign investors begin doubting its stability, and start regarding it as a riskier currency than it was before. In addition to this, many businesses and investors in the European Union have been experiencing losses from the low euro currency values in recent times.
Important points or lessons learned from this article
An important point that the article makes is that even though there are many issues at the moment between Euro countries and non-‐-‐-‐Euro countries, one thing that both opposing sides (the Europhiles and Euroskeptics) can both agree on is that if the euro zone does survive, it would have to make arrangements for a stronger political integration, bail-‐-‐-‐out fund, an establishment of a central bank that acts as a lender of last resort, and an improved and proper banking union.
The most important lesson to take away from this article is the fact that we can apply some of the concepts learned in International Financial Management such as how exchange risks and exposures can be linked to the economic and political situations of countries. We can clearly see it portrayed in this article that speaks about the political and financial management issues that countries in the European Union should try to solve in order to succeed.