Reference no: EM13874195

Assume that you are an external adviser of a Chinese chemical firm which produces in Korea for a market in France. The firm uses a range of inputs, crude oil and energy being amongst them.

The firm is considering the impact of two scenarios regarding the development of the world economy.

The first is that the current consolidation phase in the developed countries with low economic growth continues for another three years.

The second scenario assumes that during 2014 the effects of the economic crisis are over and growth in developed countries accelerates to pre-crisis levels or above.

a) How would the different scenarios affect the firm, i.e. which risks arising from the effects of the different growth rates in the developed countries is the firm exposed to? Explain.

b) What are the positives and the negatives of these risks for the two scenarios? Use a table to summarize your findings.

Now suppose that the firm considers building in a new plant either in Korea or in Belgium.

c) Would the best location for building the plant be different under the two scenarios? Explain.

The firm considers using financial derivatives to hedge against the risks associated with the two different scenarios for growth in developed countries.

d) Which (combinations of) financial derivatives could be used to hedge against the risks of associated with the two different scenarios for growth in developed countries? Discuss.

e) Would the opportunity to use financial derivatives potentially affect the decision where to build the new plant? Discuss.