In my opinion, the interests charged on payday loans are just right and not too high. This is because of the high risks involved in provision of payday loans such as presentation of fraudulent securities by clients and high chances of defaulting. Additionally, lenders of payday loans are justified in charging high interests on the loans due to high losses incurred from defaulters. Thus, the interests earned on the loans are used to set off losses incurred due to defaulting.
Moreover, payday loan lenders also incur various expenses such as operating costs and loan collection expenses that must be catered for. Thus, after paying for all the expenses incurred during administration of the loans, payday lenders are only left with realistic profits to facilitate business operations. For example, Agarwal, Skiba and Tobacman (2009) reported that the total profits earned by Advance America in the 2008/2009 financial year was only six hundred and seventy million U.S. dollars which is almost equal to interests earned by financial institutions like commercial banks on credits advanced to customers.
Karger (2011) also asserts that payday loan lenders rarely reap extraordinary profits as contemplated by opponents of payday loans. According to Bair and Annie E. Casey Foundation (2009), lenders of payday loans charge an average of fifteen percent interest on amount borrowed. Thus, the interests are not very high.
For my part, Christians should charge low interests on loans advanced to poor people. I believe that the lenders are justified in charging interests regardless of the social status of the borrower in order to enable them meet various financial obligations such as salaries for workers and expenses incurred in processing the loans. However, the amount of interests charged on loans advanced to poor people should be lower than interests charged on loans advanced to rich people. This is because poor people may lack the ability to pay back. In addition, the loans should be used to boost financial capability of poor people, hence enable them attain better living standards. Therefore, charging high interests would be detrimental.
Foreign Exchange Risk
Foreign exchange risks refer to financial challenges that business entities are likely to experience due to unforeseen changes in the exchange rates. Foreign exchange risks largely concerns financial risks that result from changes in exchange rate between domestic and foreign currencies. An exporter is likely to face foreign exchange risks because of the unanticipated changes in exchange rate between the domestic and foreign currencies which he uses to transact business. According to Jacque (2008), the degree of exposure of an exporter or business entity to foreign exchange risks depends on the economic and transactional factors as well as the ability of the exporter or business to avoid such risks.
Hedging Foreign Exchange Risk
An exporter can hedge against foreign exchange risks using either forward rate and currency future contract strategies. Through forward rate strategy, the exporter and a counter-party fix an agreed or predetermined exchange rate for future transactions, thus avoid losses that may arise from unexpected changes in exchange rates. On the other hand, currency future contract strategy is where the exporter signs an agreement with a bank to sell to him a specific amount of foreign currency at a specified price on a particular date.
In relation to the answer provided for question two, I would also assert that foreign exchange risks often have diverse financial effects on an exporter or organization. For example, it may result into decline in profits, reduced cash flow and reduction in value of the business. Thus, it is important for an exporter to adequately assess the foreign exchange risks that are likely to be faced by the organization and take appropriate measures to hedge the business from such risks. For example, the exporter may contract a bank or an exchange specialist who would assist in determining the various foreign exchange risks likely to be faced by the business and recommend appropriate solutions.
