What is a convertible currency? What problems arise when a multinational company operates in a country whose currency is not convertible?

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What is a convertible currency? What problems arise when a multinational company operates in a country whose currency is not convertible?

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With the growth in demand for exotic foods, Possum Inc.’s CEO Michael Munger is considering expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison jerky snack packs. Historically, jerky products have performed well in the southern United States, but there are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the expansion carries some
risk. Europeans may not be as accepting of opossum jerky as initial research suggests, so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France and Sweden (the two countries with the highest indicated demand), and the second is to set up a production plant in France with the ultimate goal of product distribution throughout Europe.
 
Possum Inc.’s CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about how an international expansion and the additional risk that entails will affect the firm’s financial management process. He has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Uram has supplied you with the following list of questions:
e. What is a convertible currency? What problems arise when a multinational company operates in a country whose currency is not convertible?

Explanation & AnswerSolution by a verified expert

Explanation

A convertible currency is the currency which can be traded / converted into another currency in currency markets and can be redeemed at current market rates without any government intervention. While dealing in foreign markets, a company needs to exchange the home currency with foreign currency.  It also has alternative references like hard currency or fully convertible currency.
 
When the currency of the country in which a company conducts its foreign business, is not convertible in nature, it becomes difficult to conduct the financial operations smoothly. The host nations may have too many restrictions on their foreign business transactions. The host country may put restrictions on the quantum of currency conversion which is arising due to foreign investors investing in their country. This deters the company from making large investments. Remittance of profit from operating business in host nations  becomes difficult as it can put limitations on transfer of funds to foreign countries. This can impact the business management and strategic planning.

Sample Response

A currency which can be exchanged or converted into foreign currencies without any government restrictions is the convertible currency. When a multinational corporation operates in a country with non convertible currency, it becomes difficult to remit entire foreign cash flows. It also restricts foreign investments into that country.

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