lease refer to my initial project to answer this order because is the continuation of my project:1. Assessing Country Factors That Will Affect the Demand for Your Product
The business I would want to start is exporting custom-made shoes to China from the U.S. As you know, there are numerous factors that may affect balance of trade between the U.S and China, which may eventually impact the demand for my product in China, and my business profitability. The first factor that may affect the demand for my products in China is trade policies. Barriers to trade impact the balance of imports and exports of a nation. Policies which limit imports or subsidize exports will change the relative price of my product in China, making it less appealing to export to China as it decreases demand (Hall, 2018). The second factor is exchange rates. A local currency that has gained value substantially could pose a problem to cost competitiveness of my business as an exporter, as I may find myself priced out of the export marketplaces. Third, when inflation is running high in China, the price to create a unit of my custom-made shoes could be higher than price in in lower-inflation U.S (Hall, 2018). This may impact exports, reducing the demand for my products in China. Also, strict business regulations in China will make it difficult for my business to operate in the country. However, the good news that one of the major exports to China is shoes, and probably regulations will have a minimal impact on my business.
2. Using the Foreign Exchange Market
The spot marketplace is where financial instruments like products, securities, and currencies are traded for instant delivery. Delivery is the exchange of cash for financial instrument. To trade on sport market, I will first require selecting a bank for receiving my dollars in China. My most preferred bank is Citibank. I will also require looking at the recent bid/ask price quotation. Citibank’s recent ask/bid spread is summarized in the table below:
I will also possibly require a forward market to enter into contracts for future delivery. I will use forward trading in this marketplace for hedging against unwanted and unexpected price fluctuations (Kawai & Zilcha, 2018).
3. Monitoring Movements in the Foreign Currency’s Value
What key factors likely affect the value of the foreign currency of concern over time? Currency fluctuation is a natural effect of floating exchange rate systems, which is the custom for the majority large economies. Scores of technical and fundamental factors affect exchange rate of one currency in relation to another. Such factors comprise relative demand and supply of the 2 currencies, economic performance, differentials in interest rate, inflation, resistance level and technical assistance, and capital flows. Since these forces are typically in a continuous flux state, currency value fluctuates from moment to moment (Segal, 2019).
4. Using Currency Futures and Options
How can you use currency futures to hedge the exchange rate risk of your MNC? As an importer, I can hedge my MNC risk by purchasing the USD-IRN futures. When a rupee’s value falls, the dollar will increase in value and this the USD-INR futures value will increase. All losses on my dollar payable because of a weaker INR will be offset by long futures on USD-INR (Oswal, 2019).
How can you use currency options to hedge the exchange rate risk of your MNC? I can do the hedging using options through purchasing a call option on USD-INR set or pair. Currency options provide a viable substitute to hedging exchange rate risk. Thy provide investors with the right to sell or purchase a particular currency in a stated amount before or on the expiry date at strike price (Oswal, 2019).
The prevailing futures price of the main foreign currency for my business is as follows:
Source: Exchange Rate (2019).
The discount price for the futures is $6.
5. Monitoring Central Bank Intervention
How can your business be affected if the government or central bank attempts to strengthen the currency in the foreign exchange market? When a currency becomes strong, then t could result in a reduction in local demand. Exports become less competitive and imports cheaper. Thus my business will generate lower amount of sales in the event of a strong currency (Petting, 2017).
If the government or central bank decides to weaken the currency, how will your business be affected? A weaker currency can assist a nation’s exports increase marketplace share when its products are cheaper relative to products priced in a stronger currency. The rise in sales may increase economic growth and employment, whilst firms including my business will experience growth in profits for doing business in China.
How can indirect government or central bank intervention affect your business even if there is no impact on exchange rates? Indirect government intervention through indirect taxes such as VAT may affect my business through increased business production costs.
6. Assessing Spot and Forward Rates
As far as the U.S Dollar Citibank buys at 0.6962 and sells at 0.6723. EastWest Bank buys 0.6962 and sells at 0.6723. From these results it appears that the spot rates are aligned across regions at a specific point in time.
Obtain a quote 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 foreign country of concern and a reference country of your choosing. Does it appear that interest rate parity exists?
One year forward rate = $1.13172 (Bloomberg).
EastWest Bank 1 year interest rate is 27%
China’s 1 year interest rate is 0.265 percent
Yes, there is interest rate parity.
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 reference country 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 reference country interest rate, as suggested by interest rate parity?
Forward rate for Chinese Yuan is $1.1889 as of 12/27/2018
Forward rate for Chinese Tuan is $1.2113 as of 12/28/2018
Discount/ premium= forward less spot=$1.1889-$1.2113=0.6777
Discount is higher =0.6777
P = (forward minus spot)/ spot
=0.56 0r 56%
P= (1 + 0.00265)/ (1+0.27) -1
Because of the high IRP from the home currency, the premium requires showing a high forward premium. That’s to offset large disparity. The forward can’t show a discount any longer, and it won’t be prudent for my business to partake in forwards marketplace currently.
Exchange Rate. (2019). US Dollar (USD) to Chinese Yuan (CNY) exchange rate history. Retrieved on November 12, 2019 from https://www.exchangerates.org.uk/USD-CNY-exchange-rate-history.html
Hall, M. (2018). Which Factors Can Influence a Country’s Balance of Trade? Investopedia. Retrieved on November 12, 2019 from https://www.investopedia.com/ask/answers/041615/which-factors-can-influence-countrys-balance-trade.asp
Kawai, M., & Zilcha, I. (2018). International trade with forward-futures markets under exchange rate and price uncertainty. Journal of International Economics, 20(1-2), 83-98.
Oswal, M. (2019). How to effectively hedge currency risk through the exchange. Retrieved on November 12, 2019 from https://www.motilaloswal.com/article_new.aspx/1325/How-to-effectively-hedge-currency-risk-through-the-exchange
Petting, T. (2017). Problems of a strong currency. Economic. Retrieved on November 12, 2019 from https://www.economicshelp.org/blog/3457/currency/problems-of-a-strong-currency/
Segal, T. (2019). Currency Fluctuations: How they Affect the Economy. Investopedia. Retrieved on November 12, 2019 from https://www.investopedia.com/articles/forex/080613/effects-currency-fluctuations-economy.asp
Below is the new order:
ndividual Project: Running your own multinational corporation integrated project
This week you will continue working on your Final Project for this module. The purpose of the Final Project is to apply the concepts and techniques of the module to the analysis of real-world situations or problems. You are expected to carry out an original analysis rather than summarise or rehash existing work.
This week you will be exposed to the various precepts of international finance to include applied techniques for managing the multinational enterprise. Based on sound theoretical frameworks and best practices this integrated project will help you apply your understandings derived from the assigned textbook readings, problem sets, and outside readings, in order that you may build and manage your own MNC. This integrated assignment will enable you to apply key concepts and best practices from each chapter to manage your virtual MNC.
The evaluation and grade of your responses will be based on the following criteria:
Comprehensive nature of responses to the questions as it relates to your chosen MNC venture
Quality and maturity of thought
Your response to the integrated questions below is due at the end of Week 6.
Next to each subtopic the relevant chapter is listed for your reference and review.
7. Determining Whether IFE Holds (Chapter 8)
Use The FT, 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 prevailing interest rate in the reference country you’ve chosen 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.
8. Monitoring Exchange Rate Trends (Chapter 9)
Use a business periodical or the Internet to determine how the value of the foreign currency of concern has changed during the last year. Does it appear that there is a trend over this period? What is the mean percentage change over this period? If you believed that the currency’s value would continue following the recent trend, would it appreciate or depreciate in the near future?
9. Recognizing Exposure to Exchange Rate Risk (Chapter 10)
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.
10. Hedging with Forward Contracts (Chapter 11)
Given your exposure to exchange rate risk, explain how you could use forward contracts to hedge.
Explain how you could use currency options to hedge your exposure.
Review the currency options quotations for the foreign currency of concern in any financial publication, 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.)
11. Denominating Receivables in U.S. Dollars (Chapter 12)
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 your country’s currency 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.
12. Establishing a Subsidiary in Foreign Country (Chapter 13)
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.
Use the Turnitin link below to submit your Project Outline.
Turnitin Assignment Module Project — Turnitin
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