International trade develops because certain countries are able to produce some goods more efficiently than other countries. They exchange goods to satisfy their needs and wants. Efficient production may be the result of several factors. A certain climate in a particular country may allow that country to grow agricultural products in large quantities. For instance, the climates in the United States and Canada are suitable for production of large amounts of wheat. Natural resources such as oil or coal are rich in other countries. Countries with a large pool of unskilled laborers are able to produce products which are labor intensive more cheaply than countries with highly paid, skilled labor forces. Another factor is geographical location.
The Scottish economist, Adam Smith, believed that in a free market countries produce whatever they can most efficiently grow or manufacture. In other words, if they can make more money growing cotton than making cloth, they grow
International trade always creates the
need for forward operations, if the exchange risk is to be hedged. Let us
consider the case of a Swiss importer who has bought goods in Germany, in-
voiced in Euro, payable in 90 days. To eliminate the risk of a significant rise
of the Euro in the meantime and also to have the basis for an exact price
calculation, he buys the Euro 90 days forward. In the converse case a Swiss exporter knows that in three months he will receive U. S. dollars in payment for this export. Here again, in order to eliminate the exchange risk, he hedges by selling the U. S. Dollar three months forward. Not to do these, forward transactions would be equivalent to speculating, on a fall of the Euro in the first case, or a rise of the U. S. dollar in the second case. |
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