FINANCIAL ANALYSIS

Q1

Financial decision is a critical aspect of any organization. Financial report indicates the stability of an organization. In order to make the right financial decision, the financial decision makers first take into consideration factors such as inflation and exchange rate as they have a significant impact on any decision made. Exchange rate expresses the quotation of the national currency in respect to the foreign currency. For this reason, the exchange rate can be considered to be a conversion factor, a ratio or a multiplier (Oxelheim & Wihlborg, 2008). The difference in the exchange rate is the price that the decision makers are concerned with. The exchange rate may have a significant impact on the price due to its free movement that may turn into a fast moving price in the economy that can be associated with foreign goods.

Inflation rate can be considered to be a determinant of the exchange rate. A high inflation results to the depreciation of the currency. A low rate of inflation results to the appreciation of currency which means that companies can enjoy great profits from the price index of the company. A high inflation rate results in a weak version of price dynamics which forces the company to adjust to the price of products in order to maintain a desirable profit margin against the cost of producing the goods (Oxelheim & Wihlborg, 2008). It is necessary to equalize the price dynamics more than the exchange. The overall price levels of the company relate directly to the economy in which the exchange rate is an exactly a counter balance for inflation dynamics. The financial decision makers have to consider the two factors in order to have a pricing model that will be favorable to the clients and be profitable to the company. For example, high inflation devalues the local currency makes exports cheaper resulting in great profits for exporting companies (Oxelheim & Wihlborg, 2008). However, importing companies pay a high cost due to high differential exchange rates resulting in huge losses. Low inflation rates make exports costly reducing the competitiveness of exporting firms. An appreciation of currency makes raw materials cheaper such as oil.

Q2

Liquidity is important in depository institutions management in different ways. Liquidity management is an important aspect of a successful business. One it is important because it saves time. This attributes to the ease of conducting business especially automated liquidity (Banks & Palgrave Connect, 2014). This means that money can move from one account to another within the shortest time span when certain criteria are met. Processing of loans because much easier and the time spent is usually minimal. It increases interest paying on accounts. Excess cash can be used to generate some regular income. Liquidity plays a significant role in the money markets. This ensures that money invested in the market account earns interest. It also creates an investing opportunity for the institutions (Banks & Palgrave Connect, 2014).

Management is able to secure liquidity through corporate cash management. These include corporate deposit accounts that manage the cash flow, trust funds and foreign currency deposits. This ensures a steady liquidity for the depository institutions. It is also secured through web-based platforms, straight file transfer that speeds up transactions that (Banks & Palgrave Connect, 2014). They are also keeping tabs with the market trends especially on exchange rates that them to make the right decision on the viable market in investing option that further generate more cash flow for the institutions.

 

Reference

Banks, E., & Palgrave Connect. (2014). Liquidity risk: Managing funding and asset risk.

Oxelheim, L., & Wihlborg, C. (2008). Corporate decision-making with macroeconomic uncertainty: Performance and risk management. New York, NY: Oxford University Press.