Global financing and exchange rate mechanisms Essay

Global financing and flip rate mechanisms - Essay Example mammoth Mac was specifically under consideration because it was the only chain present in almost every country and turn out an affordable equipment casualty, that can be dealt with an average income individual (Kotler & Armstrong, 2009). BIG MAC THEORY Mc Donalds best selling product is Big Mac. While hanging out with friends, or for lunch or dinner, people order mouth watering Big Mac with accessories. Big Mac Theory is a theory named to make this product, the most profiting product around the globe. The theory that stabilizes the Big Mac profit is the blood between currencies, the United States Dollar (USD) with other outside currencies at current interchange rates. Fed, an economist calls this exchange rate theory a game of achieving with currency rates. Big Mac theory tells us that the received exchange rate that is a nominal exchange rate was adjusted for the ratio of different prices to local prices that al upset s economists to compare the purchasing power of different currencies (Kotler & Armstrong, 2009). To make it clearer PPP buy Power affinity of foreign currencies is measured by the use of Big Mac Theory. Local currency is used for price semblance and will convert it into USD. The country in which Big Mac price in terms of USD is supposedly be higher, it is considered to have an overvalue in comparison to U.S. dollars. Opposite to this if the estimated price in terms of USD is low then it is an undervalued currency. Globally it is considered to be a consistent price around the globe. This theory is referred as Purchasing Power Parity (Kennedy, 2006). Other then Purchasing Power Parity, many factors are there to entrap influence on the price of Big Mac. Factors other than PPP are labor cost, rent, and other surcharges, which later on are added while fixing the final price but that only affects the local consumers and have no relation with McDonalds head institution. If the exchang e rates are allowed to fluctuate, the currency value will have and can be factorized efficiently in these variables that allow investors to employ capital inflow efficiently. In short, Big Mac theory is about profits at exchange rates (Kotler & Armstrong, 2009). GLOBAL FINANCING trading operations AND EXCHANGE RATE MECHANISMS Global financing operations are for those institutions that work or invest on an international level and follow set standard regulations, opposed to institutions who work on regional or national level. To maintain these operations, IMF, World Bank, government agencies and ministries of finance design laws and rules through understanding and economic laws. McDonalds is an international food chain and running its franchises all around the globe. It follows a law of one price that means that selling price is fixed in one currency and is sold at the aforementioned(prenominal) rate in any country at the exchange rate (Kennedy, 2006). Purchasing Power Parity (PPP) explains that purchasing power of Big Mac vary according to the price that comes out at exchange rate. For example if Big Mac is sold at $2.5 in U.S., the rate of Big Mac in U.K will be ?2. It does not include tariff charges or carriers to keep cost neutral (Kotler & Armstrong, 2009). risk of infection MANAGEMENT McDonalds Big Mac is sold every day in different regions in different quantities. It very much depends upon the purchasing power