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