BUS614: International Finance

Currency exchange fluctuation pauses a threat to foreign investors. As such, understanding the nature of the monitory policy followed by the host state will assist investors understand the exact type of risk they could encounter. The paper thoroughly examined different host state approaches in regard to currency exchange and proved that currency exchange threat could form one of three risks.

Classically currency exchange fluctuation was regarded as financial risk, but the view changed after the crisis in Asia and Latin America. Currency exchange rate fluctuation may now be either political or financial risk or it could also be a hybrid of the two.

For that, it is equally important to understand the limit of host state's intervention in determining the currency exchange rate where the host state may decide to actively control the currency through inflating or deflating it like the Venezuelan government did. In such states currency exchange is considered a political risk.

It could also decide to manipulate with the currency exchange rate through artificially increasing or decreasing the value of the currency in order to limit investors form benefiting from their property rights like Argentina did. Such action is regarded as a political risk. On the other hand, manipulating with the currency exchange rate may not necessarily be for the purpose of depriving investors from their property rights rather could be to drive the host state's growth higher like what China did with the US Dollar recently. In such case, the currency exchange here may be regarded as a political financial risk.

Alternatively, intervention means that the host state will step in to protect its currency and markets in order to evade a catastrophic or eminent threat to the currency or to its market or may be taken as an answer to a crisis that is in the shaping or one that already took place. This is for example what happened in Greece in 2008 where the government imposed currency controls until 2016 in response to the financial crisis the country experienced [Smith 2016]. In such scenarios, currency exchange threat may be regarded as a political financial risk.

Finally, it can be concluded that the key to finding out the exact nature of currency exchange threat lies in understanding the nature and degree of the host state's intervention in currency exchange rates and the monitory policy the state follows.