Chapter 1 Running Your Own MNC
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 success-ful 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. The following questions will help you define your MNC idea:
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?
Chapter 3 Running Your Own MNC
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? What is the bid/ask spread on a recent quotation by that bank? (Call the bank to obtain quotations.)
3. Will you possibly need the forward market? Explain.
Accessing Bid/Ask Rates
Go to http://sonnet-financial.com/rates/full.asp. Determine the prevailing bid and ask exchange rates for the currency that you will use for your business transactions.
Accessing Recent Exchange Rates
Go to http://www.oanda.com. Click on FXTrends. Explain how the main foreign currency for your business has changed over the last month, the last three months, and the last year.
Chapter 4 Running Your Own MNC
Monitoring Movements in the Foreign Currency’s Value
What key factors likely affect the value of the foreign currency of concern over time?
Chapter 5 Running Your Own MNC
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 http://www.cme.com. Determine the prevailing futures price of the main foreign currency for your business. Go to http://www.oanda.com and determine the prevailing spot rate. What is the discount or premium of the futures price?
Chapter 6 Running Your Own MNC
Monitoring Central Bank Intervention
1. How can your business be affected if the Fed attempts to strengthen the dollar in the for-eign 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 http://patriot.net/~bernkopf/. Go to 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.
Chapter 7 Running Your Own MNC
Assessing Spot and Forward Rates
1. Obtain a quotation for the spot rate of the foreign currency (that you will receive from your business) from the bank where you intend to conduct your foreign exchange transactions. Then, obtain a quotation for the spot rate of the foreign currency from another bank. Does it appear that the spot rates are aligned across locations at a given point in time?
2. Obtain a quotation for the one-year forward rate of the foreign currency from the bank where you intend to conduct your foreign exchange transactions. Then, use a business periodical to determine the prevailing one-year interest rates in the United States and the foreign country of concern. Does it appear that interest rate parity exists?
3. Review the data on forward rates from The Wall Street Journal or another source to determine whether the foreign currency of concern 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?
Chapter 8 Running Your Own MNC
Determining Whether IFE Holds
Use The Wall Street Journal or another data 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. 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.
Chapter 9 Running Your Own MNC
Monitoring Exchange Rate Trends
Use a business periodical or the Internet 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? What is the mean percent-age change over these weeks? If you believed that the currency’s value would continue following the recent trend, would it appreciate or depreciate in the near future?
Chapter 10 Running Your Own MNC
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.
Chapter 11 Running Your Own MNC
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 in The Wall Street Journal, or from an Internet 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.)
Using Futures Quotes
Go to http://www.cme.com. Determine the prevailing futures price of the main foreign currency for your business. Go to http://www.oanda.com and determine the prevailing spot rate. Would you hedge any transactions for your business based on the futures price relative to the spot rate.
Chapter 12 Running Your Own MNC
Denominating Receivables in U.S. Dollars
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.
Chapter 13 Running Your Own MNC
Establishing a Subsidiary in Foreign Country
1. Assuming that your international business is successful, identify reasons why it may be feasible to establish a small subsidiary in the foreign country rather than continue exporting.
2. Identify the disadvantages associated with establishing a small subsidiary in the foreign country of concern.
Chapter 14 Running Your Own MNC
Deriving a Required Rate of Return for an International Project
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.
Chapter 15 Running Your Own MNC
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.
Chapter 16 Running Your Own MNC
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.
Chapter 17 Running Your Own MNC
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?
Chapter 18 Running Your Own MNC
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.
Accessing Long-Term Interest Rates
Go to http://www.bloomberg.com and review the yields (rates) of foreign currencies. The long-term interest rates shown here reflect the government cost of borrowing, so an MNC would have to pay a slightly higher interest rate than the rate shown. What is the government’s borrowing rate in your target country? Is the rate higher or lower than the government rate in the U.S.? What rate do you think you would have to pay if you borrowed funds in your target country?
Chapter 19 Running Your Own MNC
Ensuring Payment for Exports
Explain how your business could ensure payment for the products that you are exporting to a foreign country.
Chapter 20 Running Your Own MNC
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.
2. Explain how you could use foreign financing for your business in a manner that would reduce your exposure to exchange rate risk. Be specific.
Chapter 21 Running Your Own MNC
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 have some existing short-term debt, would you prefer to invest the cast in short term securities or would you pay off the debt?