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BUS 401 WK2: International Business Case Assignment

Essay Instructions:

Assignment Instructions

Before starting the case, make sure to go through the required reading material carefully. Review the concepts of exchange rates, currency hedging, and other methods of dealing with exchange rate risk. The topic of this module is difficult, so make sure you go carefully through all of the required tutorials and book chapters. When you have finished reviewing the background materials, apply your knowledge of the material to answer the following questions in a four to five page paper:

  1. Suppose you are running a very small business that exports all of its products to Europe, and 100% of your revenue comes from Euros. You have a family to support and a drop in the value of the Euro could be devastating to your personal financial situation. What methods do you think would be best to manage this risk under your circumstances? Refer to at least one of the required readings from the background materials in your answer.
  2. Consider a large multinational consumer product company with operations in all major advanced and emerging economies. Now suppose the value of Indonesian and South African currencies drops dramatically and the value of the Chinese RMB increases dramatically. What kind of strategic changes in marketing and/or location of production facilities do you think this company should take given these new exchange rates? Explain your reasoning, and make references to Avadhani (2010) and Shackman (2015) in your answer.
  3. Suppose you are a financial manager stationed in a foreign country, and your boss at headquarters in New York asks you to make a prediction about the future exchange rates in the country you are currently in. You see that the economy in the country you are in has started to grow more rapidly with a lot of new foreign investment. You also see that prices are much lower in this country than they are back in the U.S. For example, you see that the price of a Big Mac at McDonalds is half of what it costs you at home. Would you tell your boss that you expect the value of the currency in this country will increase or decrease? Explain your reasoning, and make references to Agarwal (2009) in your answer.
Essay Sample Content Preview:

International Business
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International Business
For businesses that are dealing with imports and exports, there is always the risk associated with foreign exchange changes. In this case when running a small business, where much of the merchandise is exported into the Euro zones, the business runs a risk of the Euro dropping in value, between the date of transaction and that of the settlement. In which case, the value of the goods of services offered is lost to the tune of the rate of drop in the currency value. This can plainly be seen as a loss due to the difference in the expected amount payable during the transaction and that payable at the settlement date with revised rates (Avadhani, 2010). This is a risk that has a potential impact on the cash flow and it is common for most companies to hedge relative to such kind of exposure. To hedge, the two main ways include investing in an exchange trade fund or buying into a currency hedge mutual fund. It would also be crucial to buy into the undervalued currencies (Goyal, 2013). This is much like buying into the undervalued stocks. In countries that have a big difference between their import and the exports, this could mean that their currency is uncompetitive and may fall soon, making it an alternative and lucrative market. It could also be crucial to buy into currencies that have high interest rates, as tis would mean that the money would constantly appreciate (Goyal, 2013). To stay ahead of the curve it could also help to short an overvalued currency and make the gains. These are crucial steps to make sure that the company stays afloat despite the dive in the Euro currency, which could easily mean going under (Agarwal, 2009).
Multinational companies are constantly faced with the dynamism of the international markets due to a myriad of factors that play part in this realm of trade. Elements such as the political atmosphere and legal aspects of the countries in question among others have a very subtle effect on multinational businesses. What is more complex is the fact that, the managers have to deal with the different elements in the different markets, market segments, regional politics and global aspects all at the same time and basically in real time (International business finance, 2014). In the case where, one country has it currency loosing value due to a number of reasons while another is gaining value is a common scenario. There are quite a number of strategies that can be applied to salvage the situation. At the forefront is the involvement of the research and development team to determine the various...
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