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Chapter 1 Running Your Own MNC Developing Your Idea 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. 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: 1. What is the product that you plan to sell? 2. What foreign country do you plan to target? 3. How will you sell the product in that country? ... through a distributor? by mail?) 4. Is there some evidence that consumers in that country would buy this type of product? 5. Do you need to purchase supplies or to hire labor? Wil any expenses you incur from producing the product be in dollars or some other currency? Chapter 2 Running Your Own MNC Assessing Country Factors That Will Affect the demand for Your Product 1. 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. 2. Which of these factors is likely to be most important in affecting the demand for your product? Accessing Trade Data Determine whether the product you plan to sell is already one of the main exports to that country Accessing Import Controls Review the import controls set by that country's government. Determine whether your business would be affected by trade regulations. Chapter 3 Running Your Own MNC 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.) Will you possibly need the forward market? Explain. Chapter 4 Running Your Own MNC Monitoring Movements in the Foreign Currency's Value What key factors likely affect the value of the foreign currency of concern over time? = Chapter 6 Running Your Own MNC Monitoring Central Bank Intervention 1. How can your business be affected if the Fed attempts to strengthen the dollar in the foreign exchange market? 2. If the Fed decides to weaken the dollar, how will your business be affected? 3. How can indirect central bank intervention affect your business even if there is no impact on exchange rates? Accessing Central Bank Information Go to www.bis.ora/cbanks.htm 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 1. 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? 2. 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? 3. 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 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? Chapter 8 Running Your Own MNC 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 Chapter 9 Running Your Own MNC 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? Chapter 13 Running Your Own MNC Establishing a Subsidiary in Foreign country 1. 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 14 Running Your Own MNC Deriving a Required Rate of Return for an International Project II Consider 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 19 Running Your Own MNC Ensuring Payment for Exports Explain how your business could ensure payment for the products that you are exporting to a foreign country. Chapter 20 Running Your Own MNC Financing in Foreign Currency 1. 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 U.S. interest rate: Is the foreign interest rate typically higher or lower than the U.S. 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. Chapter 1 Running Your Own MNC Developing Your Idea 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. 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: 1. What is the product that you plan to sell? 2. What foreign country do you plan to target? 3. How will you sell the product in that country? ... through a distributor? by mail?) 4. Is there some evidence that consumers in that country would buy this type of product? 5. Do you need to purchase supplies or to hire labor? Wil any expenses you incur from producing the product be in dollars or some other currency? Chapter 2 Running Your Own MNC Assessing Country Factors That Will Affect the demand for Your Product 1. 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. 2. Which of these factors is likely to be most important in affecting the demand for your product? Accessing Trade Data Determine whether the product you plan to sell is already one of the main exports to that country Accessing Import Controls Review the import controls set by that country's government. Determine whether your business would be affected by trade regulations. Chapter 3 Running Your Own MNC 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.) Will you possibly need the forward market? Explain. Chapter 4 Running Your Own MNC Monitoring Movements in the Foreign Currency's Value What key factors likely affect the value of the foreign currency of concern over time? = Chapter 6 Running Your Own MNC Monitoring Central Bank Intervention 1. How can your business be affected if the Fed attempts to strengthen the dollar in the foreign exchange market? 2. If the Fed decides to weaken the dollar, how will your business be affected? 3. How can indirect central bank intervention affect your business even if there is no impact on exchange rates? Accessing Central Bank Information Go to www.bis.ora/cbanks.htm 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 1. 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? 2. 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? 3. 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 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? Chapter 8 Running Your Own MNC 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 Chapter 9 Running Your Own MNC 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? Chapter 13 Running Your Own MNC Establishing a Subsidiary in Foreign country 1. 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 14 Running Your Own MNC Deriving a Required Rate of Return for an International Project II Consider 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 19 Running Your Own MNC Ensuring Payment for Exports Explain how your business could ensure payment for the products that you are exporting to a foreign country. Chapter 20 Running Your Own MNC Financing in Foreign Currency 1. 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 U.S. interest rate: Is the foreign interest rate typically higher or lower than the U.S. 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