Contractionary Monetary Policy
Contractionary monetary policy is defined as macroeconomic tool that is used by the central bank of a country or its finance ministry for purposes of slowing down the economy. This kind of policy is enacted by a government with the aim of reducing the supply of money and ultimately, spending within a country. There are a couple of ways through which this is done and they include the following:
- Increased interest rates
- Increased reserve requirements
- Reduced money supply either indirectly or directly
The policy is used during growth periods of business cycle that are high but he effect is not immediate. Therefore, this means the purpose of the policy is emphasizing on reduction of money supply for less investment and spending thereafter slowing the economy down. The idea is making sure people spend less by making the prospect cost of holding cash high. The policy’s effectiveness varied in accordance to investment and spending patterns in the economy.
The major purpose of this policy is slowing down inflation which accompanies a flourishing economy. The government will apply different techniques to accomplish this and they include, slowing government spending. The interest rates can also be raised making it more costly to borrow money. Inflation is slowed by reigning economic growth and this aids cool the markets off and also decreases overall demand which means the prices also go down.
Inflation leads to ever rising prices and this eventually negatively impact the spending power of the consumer. The fluctuation of prices can leave the consumers erratic and nervous in regard to spending patterns. This policy aids stabilize prices as inflation slows increasing consumer confidence and keeping the economy even while encouraging spending patterns that are stable.
A contractionary monetary policy slows down production. This is a by-product of the country’s economic engine slowing down. The major culprits in this case include r3educed product and service demand as well as costly investment capital. Once production is geared down by companies, it often takes years before it is ramped again. If this policy exceeds the mark and tightens a country’s economy relentlessly than intended, companies slow down production and this in turn shutters plans for expansions. Consequently, this throws the economy into a recession loop.
Contractionary monetary policy can also cause increased rate of unemployment because as companies slow down their growth rate, they are forced to hire less employees. Increased cases of unemployment cost the government increased insurance admin costs as well as social service expenses. Therefore, governments are supposed to weigh the cost of this against economic benefits associated with inflation reduction. High rates of unemployment can reduce consumer confidence as well.
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Objectives of the World Trade Organization
The World Trade Organization was formed after GATT members signed an agreement in 1994. Unlike GATT, the World Trade Organization was formed after signing an international treaty that was approved by all participating countries. Thus, organization has an international status just like the World Bank and the IMF. However, the WTO is not a United Nations’ agency.
GATT was not an organization but a legal arrangement but the WTO is an international organization established as a permanent institution. It acts as the watchdog in the world of goods, services, foreign investment and intellectual property trade among others.
The main objectives of the World Trade Organization are as follows:
- To implement a new system of the world trade as envisioned by the treaty
- To promote global trade in a way that is beneficial to all member countries
- To enable developing countries to secure a balance in sharing the advantages of the expanded international trade that corresponds to their growth and developmental needs.
- To eliminate hurdles that hinder the establishment of an open global trading system while ushering in an international renaissance economically since global trade is a crucial instrument that can boost economic growth of the member countries
- To boost competitiveness among the trading partners in order to benefit consumers while fostering global integration.
- To increase productivity and production levels with an aim of boosting employment levels globally.
- To utilize and expand global resources to maximum levels
- To improve the living standards of the global population while boosting economic development in the member countries.
- To eliminate discriminative treatments in terms of the international trade
- To boost real income as well as trade in services and goods in the member nations.
- To enhance environmental protection while accepting concepts aimed at enhancing sustainable development in member nations.
Since its establishment, the World Trade Organization has provided a forum via which member countries negotiate their relations in multilateral trades on the basis of the treaty that was signed in 1994.
The organization has also administered the procedures and rules that govern the settlement of different trade disputes. It also administers the review mechanism of trade policy. The World Trade Organization cooperates with the International Monetary Fund when appropriate to enhance coherence in the process of making global economic policies. It also cooperates with the World Bank and other affiliated agencies in enhancing coherence in the global economic policies.
Additionally, the World Trade Organization has facilitated the implementation, operation and administration as well as furthering the objectives of the agreement signed in 1994 and multilateral trade treaties while providing a framework for the administration, operation and implementation of plurilateral trade treaties.
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Objectives of the World Bank
The World Bank also called the International Bank for Reconstruction and Development is a global financial institution that offers financial assistance to member countries while supplementing and promoting private foreign investment as well as promoting a long-range balance in the growth of the international trade. It was established in 1945 and opened officially in 1946.
The World Bank played a significant role in the reconstruction of countries that had been destroyed by the Second World War. Since the 1960s, the focus of the World Bank has shifted from the industrialized countries to the development of the third-world countries. It has done this by providing long-term investment loans with reasonable terms to these countries and private investors.
Among the objectives of the World Bank include the following:
- To help in the development and reconstruction of the territories of its member countries by facilitating capital investment through productive means such as economic restoration of countries disrupted or destroyed by war. It also does this through reconversion of the productive facilities for peaceful needs and encouraging establishment of productive resources and facilities in the developing countries.
- To promote investors through participation or guarantee in loans as well as other investments that private investors make.
- Supplementing private investments through provision of sustainable finance conditions when there is no sufficient private capital on reasonable terms for productive purposes. It does this by providing its own capital fund.
- To promote a long range balanced development and growth of the international trade as well as maintaining equilibrium in the balance of payments. It does this by encouraging international investors to develop productive resources in member countries, thereby helping in enhancing productivity, living standards, and labor standards within their territories.
- To arrange for loans made and/or guaranteed in regards to the international loans via other channels to ensure that more urgent and useful projects, small and large alike are handled first.
- To execute its operations while considering the effects that international investment has on the business conditions of the member countries and also the immediate post-war period. The World Bank also aims at ensuring a smooth transition from the war period to the peacetime duration and fostering economic prosperity of the world.
In trying to accomplish these objectives, the World Bank provides technical support to its member countries. For this reason, it has formed The Economic Development Institute. Member countries can also get loans from this bank of up to 20 percent of the share of the paid-up capital. The World Bank determines the conditions, terms and interest rates of the loans that it gives its member countries.
Generally, the World Bank gives loans to members for specific and dully submitted projects. The debtor country repays the loan in the currency via which it borrowed it or reserve currencies. Before borrowing loans from the World Bank, private investors are required to seek permission from the countries where they will collect the money.
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Floating Exchange Rate
Floating exchange rate is also known as fluctuating exchange rate and it refers to a kind of exchange rate system through which the currency value is given time to fluctuate in accordance to the market foreign exchange. A currency using floating currency is commonly referred to floating currency and it is contrasted with a currency that is fixed.
It is the decision made by a country to allow the value of its currency to change in a free manner. In such cases the Central Bank does not constrain the currency and it is not required to maintain relationship with other currencies. The value of the currency is determined by trade in foreign exchange market.
Most of the currencies in the world can be described as floating and they include some of the most traded currencies such as the Dollar, the Japanese Yen, the Euro, British pound as well as the Australian dollar. Initially, the Swiss franc was traded through a floating exchange rate but from 2011 September it was pegged to euro. Central Banks are often known to participate in markets for purposes of attempting to influencing floating exchange rate.
Canadian dollar in more than one way is similar to a “pure” floating currency as the Central Bank hasn’t interfered with the price of the dollar since 1998. The United States dollar comes in secondly and it has little changes in the foreign reserves. This is contrast to the United Kingdom and Japan currencies which need intervention to a great extent.
From 1946 to the start of the 70s, Bretton Woods system ensure fixed currencies were the norm and in 1971 United States made the decision to no longer uphold the exchange rate of the dollar at 1/35th an ounce of gold such that the country’s currency wasn’t fixed anymore. After the Smithsonian Agreement in 1973, most of the currencies across the globe made the decision to follow suit. However, other countries like most of the States in the Gulf fixed their countries currency to the value of other currencies and this has recently been linked to slow growth rates in those countries.
Whenever a currency floats targets different from the exchange rate is used for purposes of administering monetary policy. Some economists think in most cases, a floating exchange rate is far preferable to one that is fixed. Floating exchange rate adjusts automatically enabling countries to reduce impact of foreign business cycle, shocks as well as preempt the chances of a crisis of balance of payments. However, in certain cases, fixed exchange rates are preferable because they offer greater certainty and stability.
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Fixed Exchange Rate
Fixed exchange rate is at timed known as pegged exchange rate and it’s a kind of regime where the value of the currency is fixed against the currency of another country to another value measure like gold. This kind of currency is used for purposes of stabilizing the value of one currency against the one it is pegged to. This in turn makes investments and trade easier and predictable between two currencies. This is especially of great use to smaller economies whose external trade contributed to the gross domestic product.
What is more, it is also used as the most suitable means for controlling inflation. While this is the case, while the reference value increases and goes down, the currency that is pegged to it is also affected. Fixed exchange rate was common during the twentieth century. Governments favored such systems because they believed it came with key advantages such as lowering speculative capital flow risks, introducing great discipline on local policies to get rid of inflation and removing exchange risk while promoting international trade.
Other benefits associated with fixed exchange rate are as highlighted below:
- Speculative capital flow-In a system with a fixed exchange rate, high inflation within a country makes buyers who are overseas pay high prices for the exports of that country. It additionally makes the import sector of that country less competitive. This means that as the imports are strengthened, the exports are weakened.
- No risk associated with exchange rate-Fixed exchange rate gets rid of the risk associated with changes in exchange rate. It was assumed absence of such risk would be beneficial to capital flow and international trade.
- Lack of automatic adjustment to payment of disequilibrium balance-This kind of rate doesn’t automatically correct balance of payment. The government is forced to make corrections in such cases by increase the interest rate and reducing domestic demand. Consequently, this restrains the economic policies at a domestic level from focus on inflation and unemployment.
Other advantages associated with fixed exchange rate include inherent instability and the prerequisite for foreign exchange reserves that are large. In a system where the fixed exchange rate is used, the government of the given country makes the decision regarding its currency’s worth in relation to either the fixed amount of another country’s currency, fixed gold weight. Typically, the market mechanism used is an open one in which case the central bank of that country makes provision of foreign currency that is required for payment imbalance financing.
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Factors Affecting Foreign Exchange Rate
Foreign exchange rate is always dynamic and it affects every sector of life. The economic health of a country is influenced by its current exchange rate. Consequently, it is important to understand some of the factors that affect foreign exchange rate.
When the interest rate of a country rises high or falls low than the rate of another country the currency of the country with low rate is sold while that of the country with a higher rate is bought for purposes of achieving high returns. Given the demand of the currency with a high rate, its value will increase against that of other currencies. The world today had become globalized and as such, the market trend has shifted towards one of free capital mobility and foreign exchange restriction elimination.
Differential in inflation
As a rule, a country that has a consistent low inflation rate will exhibit an increasing currency value since its purchasing power will rise relatively to that of other countries. Towards the end of the twentieth century, some of the countries that had low inflation were Switzerland, Germany and Japan while in countries like United States and Canada, it came later. Countries that have a high inflation witness depreciation in currency compared to the currency of trading partners. Usually, this will be accompanied by high interest rates.
Expectations of economic growth
In order to meet the need of an ever growing population, the economy must expand. However, in cases where the growth occurs at a very high rate, wage advances are outpaced by price increased such that the buyer power of consumers decreases despite the fact they earn averagely. Majority of countries target a 2% economic growth per year. With high growth comes high inflation and consequently, the central banks raise their interest rates in order to increase the borrowing cost and slow down spending in an economy. Changes in interest rates can signal currency rate changes.
Actions of Central Bank
With majority of major economies having an already low interest rate, government officials and the Central Bank have resorted to others measures which are not used often to intervene in the markets and influence the rate of economic growth. For instance, quantitative easing is used to increase the supply of money within an economy and this involves purchasing of government bonds as well as other assets from financial institutions to give them additional liquidity
Other factors that also affect foreign exchange rate include employment outlook, political stability, public debts, and terms of trade as well as economic performance.
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Equilibrium Exchange Rate
Equilibrium exchange rate refers the rate where currency supply meets demand of that same currency. Since foreign exchange rate is affected by several factors, equilibrium exchange rate is also influenced by factors of demand and supply. Therefore, equilibrium is achieved when the demand of a currency is equal to supply. Consequently, this rate equals to the PPP (purchasing power parity) of the currency where all markets are efficient and goods are traded.
This means that across all countries, the price levels need to be observed. The equilibrium rate is talked about as something that is different from what the current market rate is and this often means 2 things. One is that the real equilibrium exchange rate will at some point in the future be different from the rate observed today. Two, the policy towards nominal exchange rate facilitates in some way, adjustment towards the real future exchange rate. As such, the question on whether there is any sense in calculating equilibrium exchange rate on the basis of policy brings about two sub-questions which include whether there are analyzable and predictable real exchange rate shifts and if such shifts can be facilitated by the policy on nominal exchange rate.
There are a couple of factors that affect the shift in equilibrium exchange rate as they include:
The agreement that real events have the ability to change equilibrium exchange rate is a universal one. The only source of dispute is how frequent such shocks are as well as how large. One possible shift source in equilibrium exchange rate is secular trends presence which is as a result of technological changes and product mix differences among others. Another likely source that affects equilibrium rate is commodity price shock. For G-5 countries that are exporters, such shocks don’t have a large impact as is the case with primary exporters.
This is another controversial cause for shifts in equilibrium rate especially in capital flows noted international. Take for example a country that is a temporary recipient of capital flows. This could be as a result of an investment boom which is generated by resource discoveries or technological change attributed to tax law changes or bulge in deficits. Regardless of the source, capital inflows will be spent at a domestic level and this will raise the demand for nontrade goods that are domestically produced and in some cases, it can also raise the price of a country’s goods in the world markets.
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Pros and Cons of a Pegged Exchange Rate
A pegged exchange rate, also known as fixed exchange rate refers to an exchange rate whereby the central bank or the government pins its official exchange rate to the currency of another country (s). Sometimes, the official currency exchange rate can also be tied to the price of gold. The purpose for undertaking such a measure is to enable the country to maintain the value of its currency within a narrowly inclined band.
There are several benefits that a country can achieve with a pegged exchange rate. Likewise, there are also demerits to taking such a step. One of the arguments in favor of a pegged exchange rate is that it ensures a reduced risk when it comes to global trade. When a particular country maintains a fixed exchange rate, buyers and sellers are able to easily come to an agreement on the price to be applied for commodities. After the contracts are sealed, there will be no risks resulting from changes in exchange rates, thus, enhancing investment.
A pegged exchange rate is also an ideal avenue to be pursued towards instilling discipline in the management of economies. A fixed exchange rate gives governments the authority of not following inflationary policies. As a result of this, there will be reduced risks when it comes to problems arising from balance of payments and unemployment. Thus, the economy will become competitive. A pegged exchange rate is an ideal incentive that can enable governments to keep inflation on the low.
On the other side of the coin, a pegged exchange rate creates an environment where there is dire need for large foreign exchange reserves. A government that has implemented the policy of a fixed exchange rate requires huge foreign currency reserves at its disposal in order to maintain that rate. The lower side of this is that such kinds of reserves come with opportunity costs that can be quite expensive to a country.
Another con of a pegged exchange rate is that it is not flexible and creates a condition for limitations. With a fixed exchange rate, it becomes challenging to make response to temporary shocks. This is because there is always no chance for devaluation when the exchange rate is fixed.
A pegged exchange rate can also lead to imbalances in current account. This is because with an exchange rate that is overvalued, there are higher chances for deficits in the current account. Another demerit of an exchange rate that is fixed is that it is usually not easy to determine the right time for a country to join. If a country implements the policy of a pegged exchange rate at a high, its exports will not be competitive. On the other hand, inflation can be experienced when the rate is too low.
Owing to the pros and cons of a fixed exchange rate that are outlined above, it is clear why most economies prefer to implement it. A fixed exchange rate comes with numerous comparative advantages for trade that can help a country in shielding its economic interests.
Effects of Fixed Exchange Rates on Monetary Policy
Many researchers have been busy conducting studies on the impacts that fixed exchange rates can have on monetary policy. The studies are still on-going; however, there are a few revelations that have been made on how pegged exchange rates can impact monetary policy. One thing to be noted is that fixing the rate of exchange does not contribute to the total loss of flexibility with regards to monetary policy. Quite a number of countries would still have monetary freedom with fixed exchange rates but with certain limitations.
With a fixed exchange rate, a country’s monetary policy is limited to a certain parameter. A pegged exchange rate limits a government to making decisions based on the activities of the base country. This means that even if the fixed economy is faced with a problem like inflation, it cannot find solace by increasing supply of money into the market. The exchange rate will still remain the same as long as there is no agreement between the fixed economies to effect changes. Thus, even the current account balances of every pegged economy will remain the same until it opts out or comes into agreement with its partners to change the rates.
A country that operates on a fixed exchange rate is not autonomous; this means that it cannot be able to pursue its domestic objectives through monetary policy. It often occurs that most countries that are operating on fixed exchange rates push much of the autonomy of their monetary policies to the base countries or those nations to whom they have tied their currencies to. Fixed exchange rate economies substantially align their monetary policies to those of their base counterparts, thus limiting their flexibility.
Many business analysts have argued that monetary policy is ineffective under pegged exchange rates. The reason for this is because with a fixed exchange rate, it is not within the power of the government or even the central bank to determine the value of its currency. The fixed exchange rate reigns over monetary policy in that even if a country decides to either expand or contract its monetary policy, the fixed exchange rate will not change to the advantage of that country. A fixed exchange rate takes away the ability of a government or the central bank to influence the interest rates, exchange rates and even the Gross National Product.
In the implementation of a fixed exchange rate, there is always an initial target exchange rate that is set. This rate will be allowed to undergo fluctuation within a given range that is close to that target. Economies that are operating with the fixed exchange rate will have to keep their rates revolving around this target. However, modifications can be conducted on the exchange rate after some time depending on the performance of economies. Thus, the effects of a fixed exchange rate on monetary policy can only be achieved when these modifications are done.
New Product Adoption Process Model
How does a company introduce a new product in the market? How will consumers adopt the product? These are important questions for marketers whenever introducing a new product. Essentially, they need to identify classes, in which their adopters fall. This adoption process is also called the Diffusion of Innovation. It is not a new concept in business as it has been in existence for more than forty years. In essence, it gives a description of how consumers behave when they buy new products in the market. In this paper, we discuss the five categories in which consumers fall when adopting a new product.
Innovators: This usually denotes a small portion of the market, which fully supports the adoption of the new products. These people do not care about the price and are always enthusiastic about trying new products. However, research shows that innovators do not make loyal consumers because they keep on shifting their loyalty and trying new products elsewhere in the market. They always have the urge to be the first to own the products before average consumers can acquire it. Most peers do not take innovators seriously in their decisions.
The second category are early adopters: The membership of this group is higher than that of innovators. They are more practical about what they want even though they share the same enthusiasm as adopters. It is important to note that early adopters act as opinion leaders and may influence other consumers in the market. They are the first to hold on to the new products and influence people around them like family members and friends.
Early Majority: This marks massive entry and acceptance in the market. They account to about 30% of the entire market. Though these consumers have a taste for new products, they are not in a hurry to make a purchase until the early adopters influence them with positive testimonies about the new entrants in the market. Early majority mean a lot to the company because they result into profit since they are in large numbers. However, many new products die because they fail to reach this stage of massive acceptance from consumers.
Late Majority: Their numbers are almost equal to early majorities. They also watch from a distance to see the benefits of the new products in the market before they cause humongous surge in consumption. Manufacturers are likely to realize pinnacle profits whenever a product gets to this level of adoption. Though they consume in bulk, they are slow to accept new products.
The last step of adoption consists of laggards. These consumers resort to the new product only when they do not have any choice. It is worth noting that this group is sometimes large enough even though marketers hardly give it attention because of its reluctance to adopt the new product. This category also comprises of consumers who never adopt the new product at all because of personal reasons. Their impact is not that significant. It is important to note that the success of the adoption process largely depends on the impact of marketers, as consumers seek information about new products.
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Buyer Decision Process for New Products
Whether conscious or unconscious buying is a process, which consumers go through when acquiring products. The process has different stages that allow the buyer to make the final decision. It is important to note that the length of the process largely depends on the nature of the product in question. In other words, different goods may have unique stages for consumers. The process is much shorter for consumables like foodstuffs but it could be complex when making high involvement purchases. Moreover, the decision to buy a product depends on several factors. For example, the people around you may have impact on your busying behavior. When the cost of the item is high, you are likely to involve many people in making a buying decision as compared to when you want to acquire something cheap.
When buying a new a product you also go through the buying process. Potential buyers often see new products as unfamiliar. The process of buying new products is also called production adoption process. The process allows customers to accept the new product in the market after undergoing a series of steps. This process mainly focuses on how buyers get to know about a new product and make a decision to acquire it. Importantly, the decision by consumers to choose a new product is always psychological. It takes place in the following steps:
The first step of adoption is awareness. Here, the consumer is aware of the new product but does not have sufficient information about it. This is crucial because they cannot make a buying decision of the product if they do not know its existence. Consumers learn about new products through various channels of communication. They include but not limited to advertising, word of mouth and in-store visibility.
The second step is interest. A consumer has interest in a new product when they take a step of seeking more information about it. If this information exists, the consumer will start collecting it from various sources.
The third step is evaluation. This is where the consumer makes decision on whether trying the new product makes sense or not. However, this stage only takes place if the consumer has gathered information about the new product for analysis. They base their evaluation on the quality of the products, the advantages they have over existing ones in the market and the expiry date. From this, one goes ahead to make a buying decision.
Trial: Here, the consumer takes the risk to acquire the new product to prove its perceived value. After this, the consumer may choose to purchase the new product in small qualities for a start. The last stage of a consumer buying a new product is adoption. At this point, the consumer decides to buy the product regularly. However, this stage depends on trial results. If the consumer gets appealing and satisfactory outcomes, he or she may consider the product even for future purchases. If the results during trial are not encouraging, they may drop the idea of adopting the new product for future use. It is the role of the marketing team of the manufacturer to help consumers transit through the five stages before they make a final decision. Packaging of the information for customers equally matters.
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5-Step Problem Solving Process
Life is a paradox of solving problems. Whether in business or politics, people confront varying challenges daily? Thus, there is need to have a straightforward way of solving such issues whenever they arise. A good approach in problem solving ensures that you identify the cause of the problem and if your preferred solutions are the best. When solving a problem, the solutions should have minimal negative solutions at all times.
Identify the problem: You cannot solve a problem that does not exist. As such, you should define the problem with clarity. For better understanding, it is paramount for you to look at the problem from different angles. For example, as the manager, visualize what you CEO, customers, and close associates would consider a problem. This will offer you a broad spectrum of solutions to the problem at hand. Another person’s perspective could be the best alternative in reaching an acceptable and realistic solution. At this level, it is necessary to look at causality. What is the root cause of the problem? By this, you will be able to define the problem with a lot of clarity.
Recognize issues: The second step of problem solving is indentifying the real issues surrounding the problem. Here, you get into the nitty-gritty of the problem by breaking the issues into subcomponents, which you can manage with a lot of ease. By breaking down a big issue into smaller components, you are able to identify its root cause with precision.
Generate and prioritize hypothesis: After identifying the issues to address, start thinking about how to solve them. It is unadvisable to start assigning solutions to each of the issues but rather identify various alternatives, which appear applicable and feasible. Such possible solutions transform into hypothesis, which the manager has to prioritize, do an analysis and carry out an evaluation process. After having the hypothesis, do no not disapprove every hypothesis. Instead, work with the ones that offer the best solutions, by weighing pros against cons. Divert your energies to most meaningful ideas and pursue them.
Analysis: This stage focuses on approving or disapproving your hypothesis outlined in step 3 of problem solving. At this stage, you determine the potential of every option to narrow down to the most likeable solution. It is worth noting that a great idea might not manifest at this stage but this does not mean that your alternatives are obsolete. Analysis the entire process will not guarantee you the best outcome. Of great significance is to conduct the right analysis for the process.
Advance your response: After a successful analysis, you need to convince the world that your recommendation works. To do this, change your hypothesis into recommendations that can be put into practice as part of problem solving. No one is interested in humongous analysis. Simply focus on proving your case using facts you may have gathered in previous stages of problem solving. Above all, the recommendations should appear in an appealing storyline to the audience. Where possible, help your audience to digest the analysis by defining the problem, explain the need to solve it and prove your approach.
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5-Step Decision-Making Process
Mastering good-decision making is important in business because everything is about decisions. Organizations make profits or losses because of their respective decision. Thus, one has to learn the best method that offers the best solutions. It is worthy noting that stepwise decision-making is not inherent but people acquire it through experience. However, it is also true that experience can breed bad results, especially when people dwell on bad habits that hamper business growth. For this reason, it is important to follow tested and approved method of decision-making, which has give steps as discussed below.
Identify the goal: The first step is to identify the goal. Regardless of the decision you make, you cannot avoid your ultimate goal. In this context, your goal refers to knowing the exact problem that requires a solution. Besides identifying the problem, it is equally necessary to know if you need to address the problem at hand. At this point, you figure out what matters to you in order to reach a final solution. When you appreciate why you intend to take an action, you defend the decision to the end and defend it throughout.
Gather information: The second step is gathering information to way the available options. For excellent decision-making, you need information on the problem at hand. Through this, you establish what you need to do to address the problem and helps you generate ideas for viable solutions. When gathering information, consider working with a range of options and possible alternatives even those that may appear unrealistic in the beginning. Importantly, seek information from reliable sources like experts in a field or from trustworthy friends. The best solution comes from numerous options on the table.
Consequences: Thirdly, consider the effects of the decision. From this, you visualize how the decision will affect you and people around you. Ask yourself probable outcomes of the decision you are about to make. Does it affect you now? How is it likely to affect you in future? The main advantage of this stage is that it helps you weight the merits against demerits of the decision. Moreover, it makes you feel comfortable because it allows you to analyze every possible solution critically.
Make the decision: The fourth step is making the decision. Having identified the purpose of your decision, gathered information and weighed different options, you are good to execute the decision. It raises the level of adrenaline, as one has to believe in his/her instincts. Understanding the feeling at this level is vital even though you may be indecisive about the move. To feel better, ask yourself if the decision works well for you and if you can still adopt it in future when handling related issues that require a similar response.
Evaluation: The fifth step is evaluating your decision. Implementing a decision alone is not enough. You need to review the steps you went through. This is step requires the same measure of attention as the first step. It further allows you to improve your future decision-making skills since you are able to identify the mishaps in your methodology. With this knowledge, you can make changes and adopt better decision-making processes.
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Stock Repurchase Agreement
A stock repurchase agreement is used for purposes of buying stocks back from trader/stockholder. This type of agreement can also be used by an individual who owns stock in a particular company and they are interested in selling it back. Before making an agreement on a stock repurchase agreement, it is advisable to ensure the terms are clearly outlined first. Getting this type of agreement signed aids in moving the process forward.
A stock repurchase agreement can be used when:
- A company wants to repurchase shares from one of its shareholders
- When one is a stockholder interested in re-selling their stock back to the company.
There are instances when departing stockholders are required to sell and/or the remaining stockholders might be required to purchase stock from the departing stockholders. The resulting effects of this arrangement can include any of the following:
- Liquidity might be provided to the stockholder departing according to the price per share
- It makes it possible for the surviving to retain ownership 100 percent
- Prevents undesirables from becoming part of the stockholders.
There are several reasons as to why a trader would prefer to resell their stock to a corporation. For instance, it could be a lucrative time for them to re-sell or they could be interested in getting out of that specific investment. Other instances, they might be partners in the corporation interested in selling their stock to a fellow partner in the corporation. Note that there are instances when the stock repurchase agreement is signed by a trader who wants to get their stock back. Whatever the reason might be, it is essential to have a clear understanding of how the stock repurchase agreement works. This not only makes it easy to acquire the stock back or sell it but also ensures all the terms are clearly clarified in the form of writing.
If the corporation is repurchasing the stock, it should state clearly in the agreement the amount it is purchasing it at as well what the total purchase price is going to be. In addition to this, the representations and warranties should be clearly outlined in the agreement. Ideally, this will include the power and authority which states the stakeholder has the authority and power to deliver on the agreement. Also, the enforceability and validity of the stock purchase agreement should be clearly laid out.
It is important to note this type of agreement is not only valid and legal but binding as well. It clearly outlines the obligations of the stockholder in accordance to the terms stated in the agreement.
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Reverse Repurchase Agreement
Reverse repurchase agreement refers to a type of agreement on purchase of securities upon the agreement to resell them at a high price at a future date. For the trader selling and agreeing they will purchase it in the near future, it is known as a repo while for the party buying the securities and making the agreement to sell in future, it is known as reverse repurchase agreement.
Repos are known as money-market instruments and they are used for purposes of raising short term capital. This is often a practice in which a financial institution or a bank purchases securities or other assets with the knowledge it will resell the asset or securities to that same seller. Financial institutions and investors agree to a reverse purchase agreement for purposes of raising short term capital. In actual sense, repos are the equivalent of short term loans with assets and securities serving as the collateral. Reverse repurchase agreement is not different from a repurchase agreement the only difference is that it is the buyer’s perspective rather than that of the seller. Consequently it is also known as a reverse or matched sale transaction.
For instance if A wants to sell securities to an investment firm B, then the firm should have cash it is ready to use in order to get into a reverse repurchase agreement with A. The management firm operates by the belief the price of the stock will rise before it is repurchased. If this happens, then the company selling the stock will return a higher price to company B than what was initially paid. As a result, the management firm makes a profit. However, it is ideal to note this only happens as long as the stock remains high and does not fall.
A reverse repurchase agreement can also face challenges. Key among them is that of properly matching 2 parties. This type of agreement is usually large requiring the potential investor to have immediate capital in huge amounts. As such, the investor requesting for reverse repurchase usually tends to be a group of investors like a private equity group or management firm rather than individuals.
Once the parties are matched, both get exposed to certain risks. For those repurchasing securities they are exposed to risks that are twofold. For starters, there is the possibility they will repurchase those shares at a high price compared to what they sold them at. Secondly, there is the possibility they might not be able to raise the cash needed to repurchase the securities. When this happens, it means that the investors have the right to retain the collateral which is in this case refers to the securities bought.
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