Reference no: EM132305820

Assignment

Developing Your Idea

Create an idea for your own MNC to conduct international business. Your idea should be simplified to the degree that you could possibly implement it someday. However, your idea should also be sufficiently creative to be successful if done properly. Your idea should focus on one country and one foreign currency, since many MNCs are focused in this manner when they are first created.

So that you can recognize the issues regarding exchange rate risk that are discussed throughout this text, you should assume that you will receive foreign currency when selling your product. Your idea should be for a small MNC instead of a large MNC because even most large MNCs began as small firms.

Once you have made your selection, answer the following questions.

1. What is the product that you plan to sell?

2. What foreign country do you plan to target?

3. How will you sell the product in that country? (i.e., through a distributor? by mail?)

4. Is there some evidence that consumers in that country would buy this type of product?

5. Do you need to purchase supplies or to hire labor?

6. Will any expenses you incur from producing the product be in dollars or some other currency?

Assessing Country Factors That Will Affect the Demand for Your Product

1. Identify the factors that can affect the balance of trade between the United States and the country that you targeted for your business. Explain how each of these factors may affect the demand for your product.

2. Which of these factors is likely to be most important in affecting the demand for your product?

Accessing Trade Data

Determine whether the product you plan to sell is already one of the main exports to that country.

Accessing Import Controls

Review the import controls set by that country's government. Determine whether your business would be affected by trade regulations.

Using the Foreign Exchange Market

1. Explain how you will use the spot market for your business.

2. What bank do you plan to use to exchange the foreign currency received for dollars?

3. Will you possibly need the forward market? Explain.

Accessing Recent Exchange Rates

Go to a web site that has historical exchange rate information for the main foreign currency to which your MNC is exposed. Explain how the exchange rate of that foreign currency has changed over the last month, the last three months, and the last year.

Monitoring Movements in the Foreign Currency's Value

1. What key factors likely affect the value of the main foreign currency to which your MNC is exposed over time? [You would need to closely monitor those factors over time when anticipated future exchange rate movements of that currency.]

Part two is a continuation of the project. Answer the following questions concerning your MNC identified in Part 1.

Using Currency Futures and Options

1. How can you use currency futures to hedge the exchange rate risk of your MNC?

2. How can you use currency options to hedge the exchange rate risk of your MNC?

Accessing Futures Quotes

Go to a web site that provides quotations for currency futures. Determine the prevailing futures price of the main foreign currency for your business. Go to a web site that provides exchange rate quotations and determine the prevailing spot rate. What is the discount or premium of the futures price?

Monitoring Central Bank Intervention

1. How can your business be affected if the Fed attempts to strengthen the dollar in the foreign exchange market?

2. If the Fed decides to weaken the dollar, how will your business be affected?

3. How can indirect central bank intervention affect your business even if there is no impact on exchange rates?

Accessing Central Bank Information

Go to "bis" access the Web site link for the central bank in your target country. Determine whether this central bank intervenes to control its currency in the foreign exchange market.

Assessing Spot and Forward Rates

1. Review the data on forward and spot rates of your main foreign currency to determine whether the foreign currency typically exhibits a discount or a premium. Then review data on interest rates to compare the foreign country of concern and the U.S. interest rates. Does it appear that the forward rate of the foreign currency exhibits a premium (discount) when its interest rate is lower (higher) than the U.S. interest rate, as suggested by interest rate parity?

Determining Whether IFE Holds

1. Use an onlinedata source to record the interest rate differential between the interest rate of the foreign country in which you plan to do business and the U.S. interest rate over the last five or so quarters. Then, review the exchange rate percentage change in the foreign currency of concern over each of those corresponding quarters to determine whether the international Fisher effect (IFE) appears to hold over those quarters for that currency.

Part three is a continuation of the project. Answer the following questions concerning your MNC identified in Part 1.

Monitoring Exchange Rate Trends

1. Use an online source to determine how the value of the foreign currency of concern has changed in each of the last five weeks. Does it appear that there is a trend over the last five weeks? If you believed that the currency's value would continue following the recent trend, would it appreciate or depreciate in the near future?

Recognizing Exposure to Exchange Rate Risk

Recall that when you created your business idea, it was assumed that your receivables would be denominated in the foreign currency of concern upon the sale of your products.

1. Describe your exposure to exchange rate risk. That is, describe the exchange rate conditions affecting the performance of your business.

2. Is your business subject to transaction exposure? Economic exposure? Translation exposure? Explain why your business is or is not subject to each of these types of exposure.

Hedging with Forward Contracts

1. Given your exposure to exchange rate risk, explain how you could use forward contracts to hedge.

2. Explain how you could use currency options to hedge your exposure.

3. Review the currency options quotations for the foreign currency of concern from an online source, and determine the premium that would be paid to be able to sell the currency at today's spot rate. (If the currency option data are not available for the currency of concern, skip this question.)

Denominating Receivables in U.S. Dollars

1. Recall that it was assumed that your receivables would be denominated in the foreign currency of concern. For this question only, assume that you could switch your pricing policy so that the receivables would be denominated in dollars instead of the foreign currency.

How would this switch affect the transaction exposure and the economic exposure of your business? Explain the conditions that could still cause the performance of your business to be affected by exchange rate movements.

Establishing a Subsidiary in Foreign Country

1. Identify the disadvantages associated with establishing a small subsidiary for your specific business in the foreign country of concern.

Deriving a Required Rate of Return for an International Project

1. Consider a possible project that would result in expansion of your international business. Describe how you would derive a required rate of return for this project.

Estimating Cash Flows of an International Project

1. If you seriously considered whether to implement your international business idea, you would have to measure the costs and benefits of this idea. Describe how you would estimate the dollar revenue to be received from your business.

2. Describe how you would estimate the expenses associated with your business.

3. Describe how you would estimate the net cash flows (in dollars) of your business.

4. Explain why your estimate of the net cash flows (in dollars) could be overestimated.

Part four is a continuation of the project. Answer the following questions concerning your MNC identified in Part 1.

Assessing Exposure to Country Risk

1. Describe the financial factors that expose your business to country risk.

2. Describe the political factors that expose your business to country risk.

Capital Structure Decisions

1. Describe the capital structure that you would use to run your business.

2. Why might the proportion of equity to be used in your business be limited when the business is first created?

Long-Term Debt-Denomination Decision

1. If you planned to borrow long-term funds, you could borrow dollars or you could borrow the foreign currency of concern. Using the Internet or other sources of data, compare the U.S. interest rate to the foreign interest rate over the last 8 quarters. Which interest rate is typically higher?

2. Explain why you might be able to reduce your exposure to exchange rate risk by borrowing long-term funds denominated in the foreign currency of concern.

Ensuring Payment for Exports

1. Explain how your business could ensure payment for the products that you are exporting to a foreign country.

Financing in Foreign Currency

1. Given that your business has receivables in a foreign currency, you may want to consider financing in that same foreign currency to offset the exposure. Compare the recent interest rate of the foreign currency of concern to the U.S. interest rate: Is the foreign interest rate typically higher or lower than the U.S. interest rate? Would you use financing in that currency to offset receivables? Explain.

Managing Cash

1. Given that you receive periodic payments in foreign currency for your exports, explain how you could effectively use cash management.

That is, explain how you would use the funds as they are received. If you had some existing short-term debt, would you prefer to invest the cash in short-term securities or would you pay off the debt?