FINANCIAL MARKETS AND INSTITUTIONS 4
The operations of institutions in the globalized time mean that aneffect of a particular condition in the world is significant toanother in a different place. Globalization has encouragedinteraction of factors of the economy to the point that they canaffect virtually any institution. When an organization operates in aparticular industry even at a local level, it can hardly alienateitself from the international conditions because they affect thewhole industry. The situation is similar for financial institutionsthat operate in a country. The organizations experience the effect ofboth the local and international environment. The financialinstitutions need to observe the conditions of the foreign exchangemarkets that could inform the decision to undertake in certain formsof investment (Clark, 2011).
Some people argue that if the financial institutions do not need toconsider the foreign exchange market conditions if they are notundertaking foreign exchange business. The argument supports the factthat the situations in the foreign exchange market affect theinstitutions that undertake business and never beyond. The increaseand decrease in foreign exchange rates can only affect theinstitutions that are conducting the business. Financial institutionsoperating in a local environment need to focus on the businesssituations of the local environment to inform their domesticdecision-making and therefore, consideration of the foreign exchangemarket conditions can bring an increased unnecessary burden to thecompany. He argument that support that the financial institution doesnot have to consider the condition of the foreign exchange marketargue that it domestic market present unique operation environmentthat could be different from the foreign markets (Clark, 2011).
Some people argue that the financial institutions need to considerthe conditions of the foreign exchange market even in making domesticdecisions. Globalization has enhanced intertwined interaction betweendifferent countries in the world. The condition that affects abusiness of a partner in a foreign country is likely to affect thefinancial performance of a domestic financial institution. On theother hand, the performance of the foreign exchange market could bean indicator of what could happen to the domestic market andtherefore, it could be imperative to consider it in informing thedecision-making at the domestic market (Clark, 2011).
Foreign exchange rates have a significant effect on the economy onany country. The rates of exchange could affect the rate ofinflation. The situation would mean that the valuation of securitiesin the local market could have to change to adapt to the rates ofinflation that a country has experienced. When the financialinstitution has any form of international business, it has toconsider the effects of the flow of finances to its operations. Thecurrency movement affects the value of the company, and that couldhave an effect on the valuation of the securities in the domesticmarket. In the case when the company makes massive profit or lossesfrom the international business, the valuation of its securities hasto change (Clark, 2011).
Considering the arguments of both sides of the situation, it isnotable that the internal decision-making about the valuation ofsecurities is one of the factors that financial institutions cannotavoid. Globalization has influenced the interactions betweenindustries and economies of different countries and therefore, theyhave to adjust to the situations accordingly. Decision-making on thevaluation of securities is dependent on the conditions of the foreignexchange market either directly or indirectly.
Clark, I. J. (2011). ForeignExchange Option Pricing: A Practitioner`s Guide.Chichester, West Sussex, U.K: Wiley.