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. Your idea should focus on two country and two foreign currency. 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 and have to pay in foreign currency when importing raw materials. 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 write your paper: Creating your MNC 1. What is the product that you plan to sell? 2. What foreign country do you plan to target? 3. How will you initially sell the product in that country? (i.e., exporting, franchising etc) 4. Is there some evidence that consumers in that country would buy this type of product? 5. From which country 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? 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 Recent Exchange Rates Go to www.xe.com. Select the pair of currency. Explain how the main foreign currency for your business has changed over the last month, the last three months, and the last year. What is the mean percent-age change over these months? 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. 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. 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.)