Running Your Own MNC (Project Introduction)

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 (service) that you plan to sell?
2. What foreign country do you plan to target? Who is your intended market?
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?

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Things to remember when doing this project:

Your business home country is the United States which will be doing business in a foreign country (which is provided on the list). Money will be remitted back from the foreign country (in the foreign currency) to the home corporation (in United States).

The research should be specific to your country and your industry, so the questions provided are a guideline, if you have extra information that is pertinent to your country and industry, go for it!

Include graphs and tables, always make sure that you do not just put a graph on their but that you also write and explain about it on the report.

Write this report as if you were writing to shareholders. In a way you are trying to convince them that this subsidy to this new country is a good idea.

Country and Currencies List:

Any country that holds the EURO as their country currency

Japanese Yen

Australian Dollar

Mexican Peso

New Zealand Dollar

Brazilian Real

Russian Ruble

Indian Rupee

British Pound

Canadian Dollar

Swiss Franc

Swedish Krona

Norwegian Krone

S. African Rand

China offshore renminbi (CNH).

Running Your Own MNC (Project Introduction) 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 (service) that you plan to sell? 2. What foreign country do you plan to target? Who is your intended market? 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? -----------------------------------------------------------------------------------------------------------Things to remember when doing this project: Your business home country is the United States which will be doing business in a foreign country (which is provided on the list). Money will be remitted back from the foreign country (in the foreign currency) to the home corporation (in United States). The research should be specific to your country and your industry, so the questions provided are a guideline, if you have extra information that is pertinent to your country and industry, go for it! Include graphs and tables, always make sure that you do not just put a graph on their but that you also write and explain about it on the report. Write this report as if you were writing to shareholders. In a way you are trying to convince them that this subsidy to this new country is a good idea. Country and Currencies List: Any country that holds the EURO as their country currency Japanese Yen Australian Dollar Mexican Peso New Zealand Dollar Brazilian Real Russian Ruble Indian Rupee British Pound Canadian Dollar Swiss Franc Swedish Krona Norwegian Krone S. African Rand China offshore renminbi (CNH). Let me know by the end of the week June 12 about the following information: Partner 1 name: ______________________________ Partner 2 name: ______________________________ Name of Organization (if you do not have one yet that is fine): _____________________________ Product or Service for Sale: __________________________ Country of Operation: ______________________________ MNC Project Outline Cover Sheet (Make sure that it has both names if you are working in team, only one person from the team needs to turn it in.) Table of Content (Have subheadings) Introduction (Business Idea) o Talk about your product/service, why is it a good business Why will people want to buy your product/service? Write as much details as you can about your business idea Country Analysis (Ch. 2,(Can also look at 13, 16) o Information about your country BOT - what are some of the things that influence trade Main imports? Is your import to the country a main import? Is there a lot of competition In the Foreign country (FC), is your industry saturated? o Benefits of doing business in FC Is it a good place to set a DFI? o Country Risk Is your country risky? What is the country sovereign risk? Is it corrupt? Corruption index? How will all of this effect doing business in FC? Currency o What is the exchange rate? You should probably include graph and try to explain any drastic movements. What is the currency? Include short, relevant history of currency Should put short-term graph (last month, last year) than include a long term graph (5 years). What are some of the major movements? What happened to make it move so drastically? Does your graph indicate stability or instability of the currency? o Is the currency stable? To check currency stable you should calculate and cite the Standard Deviation of the FC currency (you could also compare it with other FC) and estimate the VaR with an electronic spreadsheet. o Forecasted currency? What is your forecasted exchange rate? (If you have expert opinions make sure you cite who the expert is) You can use future rates to forecast as well. What does the futures rate say will happen to the exchange rate in the future? Capital Budget (chapter 14) o You can use a similar company to find estimate price, cost, demand o Calculate NPV (include table) o How would capital budget change as currency change? Will you have more foreign cost or more foreign revenue? What happens to NPV if the exchange rate decreases? Increases? How does capital budget (NPV) change based on that future forecast? Hedging o Will you hedge? Fwd rate, future rate Based on your expectation, will you hedge? o There are some emerging market currencies that may not be able to hedge using normal hedging techniques, so what other techniques could you use? What is a highly correlated currency that you could follow? Conclusion Cite your sources o Make sure that you use quotation any time you will directly quote from anything o Make sure that you correctly cite everything, you can use MLA, APA. o Have a work cited page. o You will be submitting your assignment by Turnitin Week 1 MNC Project: Chapter 2 & 3 Chapter 2 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? 3. Will you possibly need the forward market? Explain. 4. Will you use other financial markets to finance growth in your business? If so, which financial markets will you use? Accessing Recent Exchange Rates Go to www.oanda.com (or any other website that gives historical exchange rate). Click on \"Currency Tools\WEEK 3 MNC Questions Chapter 7 Running Your Own MNC 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? 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 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 year or so (can use monthly or quarterly data make sure that you compare consistent interest rate, I recommend short-term treasury security). Compare interest rate differential, inflation differential and track how the exchange rate has moved during that period. Do you believe that exchange rate movement can be explained by interest rate or inflation differential? Does IFE or PPP hold in your country? Chapter 9 Running Your Own MNC Monitoring Exchange Rate Trends How could you use currency forecasting models when making decisions? 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? You can also use the future rate as a forecasting model? What does the futures say about change in spot rate? What are some decisions you would make based on this expectation? How would these decisions benefit your firm? Week 4 MNC Project Questions Chapter 10 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. These questions are to get you to analyze how stable the currency is. 1. Describe your exposure to exchange rate risk. That is, describe the exchange rate conditions affecting the performance of your business. Is your currency relatively stable/unstable? What is the standard deviation of your currency movement? What is the maximum 1-day loss if you expect no change in the currency the next day? 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. Chapter 14 You will construct you own capital budget for your company. What is very important is that you can explain your numbers that you include for your capital budget analysis. I would find a similar company and use their income statement as an outline. 1. If earnings from subsidiary will be remitted to the parent, how will earnings be taxed? Are there any other restrictions on remitted earnings? (PWC - Worldwide Tax Service is a good resource to look at what is the corporate income tax as well as the withholding tax.) Note: look at the Appendix 14 for more information about international tax law. 2. Do capital budgeting analysis on your company. At what price would you sell your product/service? What is the demand? What would be the estimated cost? Assume 15% discount rate and calculate NPV for at least 3 years. Depending on the type of business you have depends on the amount on initial investment. Use the current spot exchange rate to convert into dollars to find NPV. (Hint: this is of course a hypothetical business, you can estimate inputs by looking at a similar company's financial statements, however the NPV should be positive). 3. How would exchange rate fluctuation impact your analysis? What happens if the foreign currency increases? Decreases? Redo the NPV table, what is the NPV using the forecasted currency (using the future rate)