International Financial Management

Project Paper Assignment

You will write an original paper on an international financial management topic. The paper should be short and focused. 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 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 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?

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.oanda.com. Click on Currency Tools, scroll down to Historical Currency Converters, and then click on Currency Trends. 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

Go to www.cmegroup.com. Determine the prevailing futures price of the main foreign currency for your business. Go to www.oanda.com and determine the prevailing spot rate. What is the discount or premium of the futures price?

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?

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.

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?

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 www.cme.com. Determine the prevailing futures price of the main foreign currency for

your business. Go to 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.