Research Term Paper (Run Your Own Multinational Corporation (MNC)), as detailed below: – Think of 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. Your idea should focus on one country and one foreign currency, since many MNCs are focused in this manner when they are first created.
Topic: Running your own multi-national corporation (MNC)
- What is the product that you plan to sell?
- What foreign country do you plan to target?
-How will you sell the product in that country? (i.e., Through a distributor? By mail?)
- Is there some evidence that consumers in that country would buy this type of product?
-Do you need to purchase supplies or to hire labor?
-Will any expenses you incur from producing the product be in dollars or some other currency?
–Using the Foreign Exchange Market
- Explain how you will use the spot market for your business.
- 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.)
- Will you possibly need the forward market? Explain.
Monitoring Movements in the Foreign Currency’s Value
What key factors likely affect the value of the foreign currency of concern over time?
Using Currency Futures and Options
- How can you use currency futures to hedge the exchange rate risk of your MNC?
- How can you use currency options to hedge the exchange rate risk of your MNC?
Monitoring Central Bank Intervention
- How can your business be affected if the Fed attempts to strengthen the dollar in the for-eign exchange market?
- If the Fed decides to weaken the dollar, how will your business be affected?
- How can indirect central bank intervention affect your business even if there is no impact on exchange rates?
Assessing Spot and Forward Rates
- 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?
- 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?
- Review the data on forward rates from The Wall Street Journalor 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?
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.
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?
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.
- Describe your exposure to exchange rate risk. That is, describe the exchange rate conditions affecting the performance of your business.
- 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.
Establishing a Subsidiary in Foreign Country
- 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.
- Identify the disadvantages associated with establishing a small subsidiary in the foreign country of concern.
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