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Chapter 1 Running Your Own MNCDeveloping Your IdeaCreate an idea for your own MNC to conduct international business. Your idea should be simplified to the
Chapter Running Your Own MNCDeveloping Your IdeaCreate 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 successful 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: 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? ie 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? Chapter Running Your Own MNCAssessing Country Factors That Will Affect the Demand for Your Product Identify the factors that can affect the balance of trade between the United States and the country that you targeted for your business. Explain how each of these factors may affect the demand for your product Which of these factors is likely to be most important in affecting the demand for your product?Accessing Trade DataDetermine whether the product you plan to sell is already one of the main exports to that country.Accessing Import ControlsReview the import controls set by that country's government. Determine whether your business would be affected by trade regulations. Chapter Running Your Own MNCUsing 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 bidask spread on a recent quotation by that bank? Call the bank to obtain quotations.Will you possibly need the forward market? Explain. Chapter Running Your Own MNCMonitoring Movements in the Foreign Currency's ValueWhat key factors likely affect the value of the foreign currency of concern over time? Chapter Running Your Own MNCMonitoring Central Bank Intervention How can your business be affected if the Fed attempts to strengthen the dollar in the foreign 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?Accessing Central Bank InformationGo to wwwbis.orgcbankshtm to access 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. 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 oneyear 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 oneyear 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 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 US 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 US interest rate, as suggested by interest rate parity? Chapter Running Your Own MNCDetermining Whether IFE HoldsUse 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 US 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 Running Your Own MNCMonitoring Exchange Rate TrendsUse 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 percentage 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 Running Your Own MNCEstablishing 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. Chapter Running Your Own MNCDeriving a Required Rate of Return for an International ProjectConsider 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 Running Your Own MNCEnsuring Payment for ExportsExplain how your business could ensure payment for the products that you are exporting to a foreign country. Chapter Running Your Own MNCFinancing in Foreign Currency 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 US interest rate: Is the foreign interest rate typically higher or lower than the US interest rate? Would you use financing in that currency to offset receivables? Explain.Explain how you could use foreign financing for your business in a manner that would reduce your exposure to exchange rate risk. Be specific.
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