MGT 365 Week 11 Discussion: Your Readings In The Global Fina ✓ Solved

MGT 365 Week 11 discussion: Your readings in the global fina

MGT 365 Week 11 discussion: Your readings in the global finance market focus on the issue of currency exchange and currency risk. How does the advent of BITCOIN change the currency risk equation? Is BITCOIN a good or bad thing for international business?

Paper For Above Instructions

Introduction

The advent of Bitcoin introduces a new dimension to the currency risk equation faced by firms engaged in international business. Bitcoin and similar cryptocurrencies combine features of money, commodity-like assets, and payment rails, producing both opportunities and novel risks. This paper analyzes how Bitcoin alters currency risk — including exchange rate, regulatory, and operational risks — and evaluates whether Bitcoin is generally advantageous or detrimental for international business operations.

How Bitcoin Changes the Currency Risk Equation

1. Nature of exchange-rate exposure. Traditional currency risk involves volatility in fiat currency exchange rates that affect cross-border cash flows and translation of foreign earnings. Bitcoin replaces or supplements fiat pairs with BTC-fiat pairs, adding a highly volatile intermediate exchange rate. When parties denominate prices in bitcoin or use bitcoin as a settlement medium, exposure shifts from fiat-fiat FX risk to BTC-fiat volatility risk (Baur, Hong, & Lee, 2018; Dyhrberg, 2016). This creates greater short-term price variability for receivables and payables unless firms immediately convert BTC to fiat.

2. Elimination of intermediaries and settlement risk. Bitcoin’s peer-to-peer ledger can reduce counterparty and settlement risk by enabling direct transfers without correspondent banks (Nakamoto, 2008; Narayanan et al., 2016). For transactions between consenting parties that accept BTC, this can lower some traditional banking counterparty exposures and payment delays, thereby altering the risk-cost tradeoff for cross-border payments (IMF, 2016).

3. Liquidity and market microstructure risk. Bitcoin markets are fragmented across exchanges and less deep than major fiat currency markets. This raises liquidity risk and execution costs for firms converting large amounts, increasing effective volatility and potential slippage (Gandal et al., 2018).

4. Regulatory and legal risk. Unlike established fiat currencies backed by sovereign monetary authorities, Bitcoin faces heterogeneous legal treatment: some jurisdictions embrace it, others restrict or ban it (European Central Bank, 2012; IMF, 2016). Regulatory uncertainty multiplies currency risk by introducing sudden legal or tax changes that can affect convertibility and operational viability.

5. Operational, custody, and counterparty risk. Using Bitcoin requires secure key management and reliance on exchanges, custodians, or payment processors. Hacks, thefts, and exchange failures create operational counterparty risks that are different from but analogous to bank insolvency or payment processor failure in fiat systems (CFTC, 2017).

Implications for International Business — Pros and Cons

Pros:

  • Faster, lower-cost cross-border payments for certain corridors. Bitcoin can bypass correspondent banking fees and delays, benefiting remittances, micropayments, or B2C purchases where both parties accept crypto (Nakamoto, 2008; Tapscott & Tapscott, 2016).
  • Financial access. Bitcoin can provide payment rails to customers and suppliers in underbanked regions where fiat rails are constrained (IMF, 2016).
  • Programmability and innovation. Smart contracts and tokenization built on blockchain infrastructure can streamline trade finance, conditional payments, and reconciliation (Narayanan et al., 2016).

Cons:

  • High price volatility. Bitcoin’s historically large price swings cause accounting and cash-flow uncertainty. If firms hold BTC between receipt and conversion, their fiat-equivalent value can change materially (Baur et al., 2018; Dyhrberg, 2016).
  • Limited acceptance and translation risk. Few suppliers, governments, or counterparties price goods directly in BTC; using BTC often requires two FX conversions (fiat→BTC→fiat), multiplying exchange rate exposures (European Central Bank, 2012).
  • Regulatory and compliance complexity. AML/KYC obligations, tax reporting, and outright bans in some jurisdictions create compliance costs and legal risk (IMF, 2016; CFTC, 2017).
  • Operational security and custodial risk. Loss of private keys, exchange hacks, and fraud are non-trivial hazards; unlike insured bank deposits, BTC theft is often irreversible (Gandal et al., 2018).

Practical Risk-Management Strategies for Firms

Firms considering Bitcoin for international transactions should adopt risk-management measures:

  • Immediate conversion policy: convert received BTC to fiat promptly through regulated exchanges or custodians to minimize exposure to BTC volatility (Baur et al., 2018).
  • Hedging via derivatives: use BTC futures and options on regulated venues to hedge price exposure when strategic BTC holdings are necessary (Dyhrberg, 2016).
  • Use stablecoins or fiat-linked instruments: stablecoins pegged to fiat can offer blockchain efficiency while avoiding BTC volatility (Tapscott & Tapscott, 2016).
  • Counterparty and compliance controls: perform KYC/AML screening, choose regulated custodians, and maintain robust key-management and insurance arrangements (CFTC, 2017; IMF, 2016).
  • Limited operational exposure: restrict BTC use to specific product lines or corridors where benefits outweigh risks and pilot thoroughly before scaling (Narayanan et al., 2016).

Is Bitcoin Good or Bad for International Business?

Bitcoin is neither categorically good nor uniformly bad for international business; its suitability depends on context, risk tolerance, and implementation strategies. For cross-border micropayments, remittances in underserved corridors, or firms that can manage volatility and compliance, Bitcoin (or blockchain-based alternatives) can lower costs and speed settlement (Tapscott & Tapscott, 2016). For mainstream multinational corporations with large exposures, volatile BTC pricing and regulatory uncertainty currently make Bitcoin a risky primary unit of account or reserve (Baur et al., 2018; IMF, 2016).

As infrastructure matures, regulated futures markets, custodial services, and clearer rules could reduce many transaction and operational risks (Gandal et al., 2018; CFTC, 2017). Central bank digital currencies (CBDCs) and stablecoins may capture many cross-border efficiency benefits without BTC’s volatility, potentially changing the calculus for international business in the near term.

Conclusion and Recommendations

Bitcoin changes the currency risk equation by introducing highly volatile crypto-fiat exchange risk, while simultaneously offering settlement, cost, and access benefits. International businesses should approach Bitcoin strategically: pilot use cases where speed and access matter, convert receipts quickly or hedge exposures, use regulated custodians and exchanges, and monitor evolving regulation. Until volatility and regulatory uncertainty decline, Bitcoin is best treated as a payment innovation and speculative asset rather than a replacement for sovereign currencies in core international treasury operations (Nakamoto, 2008; IMF, 2016).

References

  • Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system. Retrieved from https://bitcoin.org/bitcoin.pdf
  • Narayanan, A., Bonneau, J., Felten, E., Miller, A., & Goldfeder, S. (2016). Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction. Princeton University Press.
  • Yermack, D. (2013). Is Bitcoin a real currency? An economic appraisal. In Y. Handbook of Digital Currency. (Note: conceptual analysis).
  • Baur, D. G., Hong, K., & Lee, A. D. (2018). Bitcoin: Medium of exchange or speculative assets? Journal of International Financial Markets, Institutions and Money, 54, 177–189.
  • Dyhrberg, A. H. (2016). Bitcoin, gold and the dollar — A GARCH volatility analysis. Finance Research Letters, 16, 85–92.
  • Gandal, N., Hamrick, J. T., Moore, T., & Oberman, T. (2018). Price manipulation in the Bitcoin ecosystem. Journal of Monetary Economics, 95, 86–96.
  • International Monetary Fund. (2016). Virtual Currencies and Beyond: Initial Considerations. IMF Staff Discussion Note.
  • European Central Bank. (2012). Virtual Currency Schemes — A further analysis. ECB Occasional Paper Series.
  • Commodity Futures Trading Commission. (2017). Customer Advisory: Beware Virtual Currency Pump-and-Dump Schemes. CFTC.
  • Tapscott, D., & Tapscott, A. (2016). Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World. Penguin.

Related Assignments