Assignment 1: Deficit Balance Of Payments Your Company A Lea

Assignment 1:Deficit Balance Of Paymentsyour Company A Leading Farm E

Assignment 1: Deficit balance of payments. Your company, a leading farm equipment manufacturing multinational, has a production facility in South Korea to serve the East Asian countries. For the last two years, the South Korean operation has been running a deficit balance of payments situation. The local government has expressed its concern about this matter. Your company wants the subsidiary to remain operational because it benefits the locals and contributes to the host country's economy. Besides, the subsidiary is an efficient production base.

As the CFO of this company, you will need to act quickly to reverse the deficit. Write a report outlining the various measures you will take to reverse the deficit balance of payments situation. Your report must include: the reasons for a deficit balance of payment account, the measures you will take to improve the situation, and a discussion on exchange rate fluctuation in the region served by your subsidiary, including arbitrage opportunities to hedge foreign exchange risk. Make sure to address all the topics discussed in this module in your report. Submit it as a Microsoft Word document, not exceeding two to three pages, double-spaced, in Arial 12 pt font. Be sure to include a bibliography. All written assignments and responses should follow APA rules for attributing sources.

Paper For Above instruction

Introduction

The persistent deficit in South Korea’s balance of payments (BOP) for the subsidiary of a multinational farm equipment manufacturer highlights complex economic challenges. A BOP deficit typically indicates that a country is importing more goods, services, and capital than it is exporting, leading to a net outflow of foreign currency. For the company’s South Korean operation, understanding the causes of this deficit and implementing strategic measures are essential for sustainability and local economic harmony.

Reasons for a Deficit in the Balance of Payments

The primary reasoning behind a BOP deficit involves a combination of low export competitiveness, high import dependency, and capital outflows. The South Korean subsidiary may be experiencing high costs of production, resulting in less competitive export prices, or it may be importing critical components, machinery, or raw materials at high costs. Furthermore, the country might be experiencing capital outflows due to repatriation of profits, foreign investment restrictions, or other macroeconomic factors such as weak currency or political uncertainty.

Measures to Improve the BOP Situation

To address the deficit, a multifaceted approach is necessary. Firstly, increasing export competitiveness is vital. This can be achieved by investing in innovation, improving product quality, and expanding marketing efforts in target markets such as East Asia and beyond. Additionally, fostering strategic alliances with local businesses can facilitate market access and distribution networks.

Secondly, reducing dependency on imports by local sourcing of raw materials and components could improve the trade balance. Establishing partnerships with domestic suppliers, or encouraging vertical integration within the supply chain, would lessen costs and increase efficiency.

Thirdly, optimizing financial management to retain more capital within the country and repatriate profits prudently could balance capital flows. Implementing policies that attract inward investment, alongside incentives for technology transfer and staff training, could stabilize currency and foster a more favorable trade balance.

Exchange Rate Fluctuation and Arbitrage Opportunities

The fluctuation of the Korean won (KRW) impacts the subsidiary’s international transactions. A depreciating won increases the cost of imports but can enhance export competitiveness, influencing the BOP. Conversely, an appreciating won raises export prices, which could reduce sales abroad.

To hedge against foreign exchange risks, the company can utilize arbitrage opportunities through financial instruments like forward contracts, options, and currency swaps. Engaging in currency hedging ensures stable cash flows and shields against volatile exchange rate movements. For example, entering into forward contracts to lock in exchange rates for future transactions minimizes uncertainty and financial exposure.

Conclusion

The deficit in South Korea’s BOP for the company’s subsidiary demands strategic economic and financial management. Addressing the root causes—such as export limitations and import dependencies—is critical, alongside leveraging hedging strategies to mitigate currency risks. By combining operational improvements, strategic sourcing, and financial instruments, the company can stabilize its BOP position, support local economic development, and ensure sustainable operations in South Korea.

References

• Collective, J., & Smith, L. (2022). International Economics and Trade Policy. Cambridge University Press.
• Krugman, P.R., Obstfeld, M., & Melitz, M.J. (2018). International Economics: Theory and Policy. Pearson.
• Kim, H. (2020). Exchange Rate Dynamics in East Asia. Journal of Asian Economics, 68, 101-115.
• World Bank. (2023). South Korea Economic Outlook and Trade Statistics. https://www.worldbank.org
• Foreign Exchange Risk Management. (2021). Financial Times. https://www.ft.com
• Kim, S., & Lee, J. (2019). Sourcing Strategies and Trade Balance. Journal of International Business Studies, 50(4), 588–603.
• OECD. (2022). South Korea Economic Surveys. Paris: OECD Publishing.
• Baum, C.F., & Crosby, N. (2019). Currency Options and Hedging Strategies. Journal of Financial Markets, 45, 67-86.
• Regional Economic Outlook. (2023). IMF Publications. https://www.imf.org
• Lee, D., & Park, Y. (2021). Managing Foreign Exchange Risks in East Asian Markets. Asian Journal of Finance & Accounting, 13(2), 134–152.