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University of Houston-Victoria FINC4325 - International Finance Course Project Running Your Own MNC I. The purpose of the project: This project allows you to create a small international business and apply key concepts from the selected chapters to run the business throughout the second half of the school term. The questions listed below are for your reference. That means you don't need to organize the project by answering all the questions one by one because this is a project report, not an essay questions test. You are only required to discuss the major factors which may have a significant impact on the operation of your MNC. The project accounts for a total of 200 points. Total up to 30 double-spaced pages is good enough. Your project report should be well-organized and typed in a WORD file (Office 2003 or later versions). Attach the tables and/or worksheets/graphs with your project. The style and organization of the project account must meet a certain style, including listing the references that you cite in your project. A preferred style is listed at the end of this instruction. (10 points) Other writing styles are also acceptable. Some of the writing styles for project research reports can be checked here: https://www.bing.com/search?q=school%20project%20report%20writing %20style&qs=n&form=QBRE&pq=school%20project%20report%20writing %20style&sc=0-35&sp=-1&sk=&cvid=059C7BA1DF07485684F279ED2ECF6160 II. The outline for the project: 1. Executive Summary (10 points) Summarize the major findings from running your own MNC. It should cover the purpose of the project, what are the major findings, and the conclusion. Discuss on the strengths and limitations in your project. 2. Chapter 1-2 (30 points) 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 1 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? (i.e., 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? 6. Will any expenses you incur from producing the product be in dollars or some other currency? 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. 3. Chapter 3-5 (40 points) 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 Bid/Ask Rates Go to http://sonnet-financial.com/rates/full.asp. Determine the prevailing bid and ask exchange rates for the currency that you will use for your business transactions. Accessing Recent Exchange Rates Go to http://www.oanda.com. Click on FXTrends. Explain how the main foreign currency for your business has changed over the last month, the last three months, and the last year. Using Currency Futures and Options 1. How can you use currency futures to hedge the exchange rate risk of your MNC? 2. How can you use currency options to hedge the exchange rate risk of your MNC? Accessing Futures Quotes 2 Go to http://www.cme.com/. Determine the prevailing futures price of the main foreign currency for your business. Go to http://www.oanda.com and determine the prevailing spot rate. What is the discount or premium of the futures price? 4. Chapter 6 (20 points) 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 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. 5. Chapter 7 (20 points) 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? 6. Chapter 8 (10 points) 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. 7. Chapter 9 (10 points) Monitoring Exchange Rate Trends 3 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? 8. Chapter 10-12 (40 points) 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.) Using Futures Quotes Go to http://www.cme.com/. Determine the prevailing futures price of the main foreign currency for your business. Go to http://www.oanda.com and determine the prevailing spot rate. Would you hedge any transactions for your business based on the futures price relative to the spot rate. Denominating Receivables in U.S. Dollars 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 dollars 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. 9. Summary (10 points) Summarize the major conclusions of running your own MNC. Discuss the competitive status of your MNC and also the major risk/problems of the company. Discuss the implications and limitations of your management strategies. Also list the references that you cite in your project. 4 A Preferred Project Report Format 1. Report body requirements: 1. 2. 3. 4. Cover page. It lists the title of the project, student name, and semester/year. Executive Summary. It is on a separate page. Contents. It lists all numbered pages (except the cover page and abstract page). Main body. It should list all the major works you have done for the required items. If you choose to put your tables and/or graphs in the Appendices, you should refer to which table or graph you are talking about. 5. Reference. List all major reference sources. 6. Appendices. List all your tables and graphs. For reference convenience, give a title to each separate item, such as Table 1. 2. Typesetting requirements: 1. 2. 3. 4. 5. Use 11 font size. Time New Roman is preferred. Double space between lines. Number all pages, but the cover and abstract pages. One inch on all sides. Total page numbers: 25. (No more than 35 pages) 5