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Finance and Business Questions and Answers Essay Sample

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Finance and Business Questions and Answers Essay Sample

1. If the spot rate for British pounds is 0.57 pounds equals 1 US $, and the annual interest rate on fixed rate one-year deposits of pounds is 3.5% and for US$ is 2.5%, what is the ten-month forward rate for one dollar in terms of pounds? Assuming the same interest rates, what is the 18-month forward rate for one pound in dollars? Is this an indirect or a direct rate? If the forward rate is an accurate predictor of exchange rates, in this case will the pound get stronger or weaker against the dollar? What does this indicate about the market’s inflation expectations in the UK compared to the US?

Spot rate for $1 = 0.57 pounds

Fixed interest rate for pounds = 3.5%

Interest rate for US dollars = 2.5%

Ten month forward rate is calculated as

Forward exchange rate = Spot price * [(1+foreign interest rate) / (1 + Base interest rate)]^n

= 0.57 * [ (1 + 0.035) / (1+0.025)]^(10/12)

= 0.57 * [ 1.0097] ^0.833

= 0.57 * 1.0080

= 0.57456

Spot rate for $1 = 0.57 pounds

1 Pound = $1.754

Forward exchange rate for 18 months = $1.754 * [ (1 + 0.025) / (1+0.035)]^(18/12)

= $1.754 * [ 0.99] ^1.5

= $1.754 * 0.985

1 Pound = $1.7277

This is a direct rate because in quoting a foreign exchange rate it is quoted as the domestic currency per unit of the foreign currency.

If the forward rate is an exact predictor of the exchange rate, then the pound will becomes stronger against dollars as for one pound it can get $1.754 dollars. Therefore, the pound appreciates against dollar.

We know that there is an inverse relation between the currency exchange rate and the inflation rate.

Here the pound became stronger and appreciates in value against dollar. For one pound we can buy 1.754 dollars. Therefore, the purchasing power parity increases in UK and the prices of goods increases due to increased Purchasing power parity. Therefore, the inflation rate increases due to the increased prices.

Hence the inflation rate increases in UK and decreases in US

2. On January 2nd, 2011, BMW expects to ship 19,000 Mini-Cooper cars from its affiliated plant in the UK to the US, which it will sell through US dealers on 300-day terms at $26,500 each. So BMW will receive payment from its dealers on October 28th, 2011.

Assuming that BMW needs to cover its expenses in the UK and thus wants to hedge its pound exposure using a forward contract with a UK bank in the US, what is the minimum amount of pounds they should receive on October 28th, 2011 given the ten month forward rate for one US dollar in terms of pounds?

What are two other ways BMW might hedge their pound/dollar exposure?

Ten month forward rate is 1 Pound = $1.754

Hedge using forward contract

Amount receivable by BMW ($26,500*19,000 mini-cooper cars) = $ 503,500,000

Ten month forward rate is 1 Pound = $1.754

Amount received on October 28, 2011 in pounds = 287,058,153

Other ways of hedging pound/dollar exposure:

1) One of hedging is to invoice the sale value in UK pounds so that a fixed amount in UK pounds will be received whether US dollars falls or increase as compared to UK pound

2) BMW can create a hedge by fixing the value of receivables now in domestic currency. This way is called money market hedge. BMW can borrow money in us dollars, then convert this in UK sterling and invest this amount, after 10 months time the amount to be paid to bank will be equal to the amount which will be received in US dollars.

3) BMW can also hedge their currency exposure by entering in currency futures.

4) Currency options is also a method.

5) Currency swaps arrangements can also be entered for hedging the currency risk.

3. In his book Manias, Panics and Crashes (see the Introduction and Chapters posted on the class website) Charles Kindleberger explains the three stages of how a financial crisis develops and evolves over time. Please briefly explain these stages and how the 1997 Asian Financial Crisis as presented in the Hill text and the class case presentation follows this economic pattern or paradigm.

Charles Kindleberger explains in his book Mania, Panics & Crashes on the 3 stages of how a financial crisis develops and evolves overtime.

– He talks about Displacement, which talks about sudden changes in the monetary policy or an outside shock to the macroeconomics system. This displacement usually will change profit opportunities in at least one important sector of the economy.

– Second he discusses the increase flow of money into financial markets. The increase of flow of money will enlarge the total money supply. Increase money supply will lead to increase assets giving new profit and attracting more firms and investors

– And third he talks about Overtrading caused by additional investors attracted by the profits already earned will lead to another increase of profit. This in turn will lead to a bubble burst causing a financial meltdown that usually leaks to other related industries

In regards to the Asian Financial Crisis

– With reference to Displacement, Asia was experiencing an unprecedented economic growth; which was caused by a large increase of exports in basic material and an increase of heighten- technology product such as automobile, semiconductors, and consumer electronics.

– The 2 point as per the author is the case of increase flow of capital into the market, the wealth that was created by export helped increase the money supply and real estate asset. Influence from each individual countries for investors to invest, helped fuel more investors to take unnecessary risk. Real Estate assets soared primarily from Korean Chaebol caused by greed and ambition. Although Korean investment led the economic boom it came at a cost.

– The 3rd phase was that correlates to the Asian crisis and what the author talks about is Overtrade. Koreans and several other Asian countries borrowed beyond their equity, in some cases up to 4 times more. All investment in South Asia was financed with borrowed money. Investment ballooned in 1990 and the quality of these investment decline significantly because no returns were being provided from the investments. The result was excess capacity or overtrading, which ultimately led to bubble burst; when the currency fell against the dollar in made matters worse because it further increased their debt because their own currency had no value to repay the dollar debt.

4. IBM, whose global sales are generally dollar denominated, finds it has excess cash of $8,500,000,000, which it can invest for up to three years. It has determined that its best options are either a three-year Euro-dollar ($) deposit paying 2.75% or a three-year yen denominated deposit paying 1.75% since it expects the yen to appreciate 0.9% per annum against the dollar over the next three years. Using cash flow analysis, determine the best currency option in which IBM should invest. Be sure to show your complete calculations of the annual return on each investment at the end of the three-year term. Assume that the annual interest amount is reinvested, i.e. compounds, at the same annual interest rate. Would your answer change if IBM revised its outlook for the yen to appreciate 1.2% per year? Show all calculations!!!

Dollars available = $8.5 billions.

If invested in dollar deposit,

FV at t=3 years, = 8.5*1.0275 ^3 = $9.22 billions

Let exchange rate at t=0,for yen be x $/Yen

so available yen for deposit = 8.5/x billion Yen

FV of this at the end of 3 years = (8.5/x)*1.0175^3 = 8.954/x billion Yen

appreciation of Yen (at t = 3) = (1.009)^3 – 1 = 0.02724 = 2.724%

so exchange rate at t=3, for Yen = 1.02724*x $/Yen

FV in Dollars of Yen deposit = (8.954/x) * 1.02724 x = $9.198 billions

Hence, FV in dollar deposit is more than that in Yen. So it is advisable to deposit in dollars.

If appreciation of Yen per year = 1.2%

so, appreciation at t =3, = 1.012^3 -1 = 0.036 = 3.6%

Hence, FV of yen deposit = (8.954/x) * 1.036 x = $9.276 billion

Even now it is better to invest in Dollars

5. Country A has 26400 units of labor and can produce 2 goods, manufactures and food.

A’s producers take 2 units of labor to produce one unit of manufactures and 5 units to produce one unit of food. Country B has 35000 units of labor and takes 7 units of labor to produce one unit of manufactures and 5 units to produce one unit of food. What is the price of manufactures in terms of food at which A and B would respectively supply manufactures? What would A export in Adam Smith’s world? What is the amount it could supply?

Country A:

When all the labor units of country are employed for manufacturing it can produce

All manufacture= 264000/2

= 13200

So if only Manufacture is chosen Country A can produce 13200 Manufactures.

When all the labor units of country A are employed for food it can produce

All food= 26400/5

= 5280

So if only Manufacture is chosen Country A can produce 5280 Food.

So for Country A

13200 M= 5280 F

M= 5280/13200 F

For Country A; M = 0.4 F

For producing 1M country has to forgo 0.4 F, this is nothing but the opportunity cost of producing M, which is also the price of producing M.

And when calculated for Food:

F= 13200/5280 M

F= 2.5 M

Similarly for country B:

When all the labor units of country are employed for manufacturing it can produce

All manufacture= 35000/7

= 5000

So if only Manufacture is chosen Country A can produce 5000 Manufactures.

When all the labor units of country A are employed for food it can produce

All food= 35000/5

= 7000

So if only Manufacture is chosen Country A can produce 5280 Food.

So for Country B

5000 M= 7000 F

M= 7000/5000 F

For Country B; M= 1.4 F

For producing 1M country has to forgo 1.4 F, this is nothing but the opportunity cost of producing M, which is also the price of producing M.

And when calculated for Food:

F= 5000/7000 M

F= 0.71 M

What is the price of manufactures in terms of food at which A and B would respectively supply

manufactures?

For Country A:

One M is equal to 0.4 Food.

For country B, One M is equal to 1.4 Food.

These are the prices at which country A and B can supply domestically

What would A export in Adam Smith’s world?

Adam Smith has proposed the theory of absolute advantage, according to the above table country A has absolute advantage in producing manufacture, so it exports manufacture.

What is the amount it could supply?

If country A produces all Machine, it requires 5280 food. and the price of 1 food in Country B is 0.71 Machine.

So Country A to get 5280 Food it trades with (0.71 x 5280) Manufacture that is 3748.8 manufacture

6. Companies can be hurt by rapid changes in exchange rates even if they initially appear low cost compared to foreign competitors. Explain how STMicro reflects this situation and what it did to manage any future impact of exchange rates on its business.

STMicro is the sixth largest manufacturer in semiconductor in the world. They produce a wide range of computer chip, printer chips, and car chips. Initially they started off manufacturing in Europe and at that time the currency exchange was in their favor. Since the dollar was stronger then the Euro in the early 2000s (�1= $.083) the profit translated into healthy profits for STmicro. Operation cost which accounted for 70% of the companies cost were denominated in Euro while all it’s semiconductor product was priced in U.S Dollar.

But the company did not hedge when it came to foreign exchange and eventually the Euro became stronger then the dollar (�1= 1.30 in 2006) by over 50% it lost considerable amount of profit. To manage the situation CEO, Carlo Bozotti took 500 million out of operational cost and cut about 3,000 jobs in Europe while moving the manufacturing operation to Asia. In Asia they added 1500 jobs and paid a lot less for labor. Bozotti described this strategic move as “real hedging”. In hindsight this allowed the company to move their production from Europe to Asia whenever it was beneficial for them according the exchange rates.

7. Explain how Timberland developed global supply chain problems and then used IT to solve them.

Timberland success behind increased sales and shipment of bulk inventory was because of Global Distributors and Global consumer demands. Their problem however came from poorly managed supply management, because they could not track their inventory globally. They started producing goods in South Asia because production cost was cheaper which led to Timberland using different factories and courier in several South Asian countries. From a logistic standpoint this created problems in production turnaround time, useless extra operation cost, and accounting for inventory.

Timberland however used an IT group “The Rockport Group” to come out with an enhanced software system to track their entire inventory in their pipeline globally. They were able to team up with ACS, a freight company and be able to forward the product with more control. In theory they would be able to choose the method of transport for every package depending on the business needs. This system helped them to hone in on single distributors in different Continent and be able to ship the goods faster while keeping track of inventory. By managing the global supply chain it has helped allocate certain cost and help manage operation cost. “Controlling the controllable”.

This in turn led to increase in profits from 38% in 1997 to 41% in year 2000.

ESSAYS

Large firms operating globally develop strategies based on the type of industries and businesses in which they compete. Explain the four basic international business strategies discussed in the course on-line lectures and the Hill text. Then identify which of the four strategies Coke is trying to implement. After identifying the strategy Coke is using please describe and explain how and why it is pursuing the strategy it has selected in order to penetrate certain markets and meet global competition in its industry. You should also comment on the success and/or failure of its approach and implementation as stated in the text and posted readings and how it may have modified its organization, supply or marketing over time given changes in its markets, its suppliers and its industry’s competitive structure.

The four basic international business strategies are:

1. Global Standardization Strategy

2. Localization Strategy

3. Transnational Strategy

4. International Strategy.

Global Standardization Strategy – In this strategy firms concentrate on increasing profits by reducing cost and by taking advantage of economies of scale, learning effects, and location economies. The main goal is to find the lowest cost of operation. This strategy is most beneficial when the demand of cost is more important and customization has little or no impact. For this reason this strategy does not work for localization market.

Localization Strategy – In this strategy firms concentrate on increasing profits by focusing on specific customers needs and satisfaction. Therefore to give such targeted service its only appropriate when cost has little or no impact to the product. Because it focuses on local consumers responses, this strategy makes sense when their are major differences in consumer taste and value. Consumers loyalty and brand value are essential elements in localization strategy.

Transnational Strategy – In this strategy the firm deals with a combination of global standardization strategy and a localization strategy. This strategy is used when a company faces both cost related pressure and strong pressure from local response. When using this strategy, firms will normally achieve low cost through location economies, economies of scale and differentiating their product to account for local differences.

International Strategy – This strategy is directly opposite to transnational strategy. It’s when companies are fortunate to be confronted with low cost pressure and low pressure from local responsiveness. Usually items or products under this strategy are of universal appeal and are usually part of a necessity. They usually do R&D at home for control and quality and they sell the products globally with minimum customization to reach maximum profit.

Under the leadership of CEO, Neville Isdell 2004, Coca Cola pursued a transnational strategy. While the main product line coke stayed the same they responded to local marketing and product development by moving move material, people, ideas, across national boundaries. They also adopted the belief that strategy, including pricing, products and marketing message should be differed by nations market to market. One example can be of Coca Cola subsidiary in China; In 2003 Coca Cola in China developed a non-carbonated orange juice that rapidly became the nation’s best seller. So Coca Cola has placed a modified transnational strategy where marketing and new product development is adapted by the local’s while keeping their main product line coke, cost low with minimum customization. This new modified transnational strategy is better than their old localization strategy where they failed to increase growth.

2. (2 -2.5 pages double spaced – 15 points) –

After reviewing the Ruth’s Chris Steak House Case posted with this exam on the class website, please answer the following questions concerning how the Steak House should respond to the international business challenges facing it.

1. What did Hannah do to make a first cut in the list of potential variables? How did he get from 200 to less than 35 potential new markets? Which variables did he use in his decision making and why?

Hannah created criteria that included factors that were key to Ruth’s Chris success and used that to narrow down the potential new markets. The variables were:

1. Beef-eaters since their primary customers are beef eaters

2. Legal to import U.S. beef since Ruth’s Chris only used USDA Prime beef therefore it had to be exportable to the new country

3. Population/high urbanization rates since their restaurants needed to be in densely populated areas

4. High disposable income since it was a fine dining restaurant with an average cost over $70

5. Places where people wanted to go out to eat

6. Affinity for U.S. brands, meaning overtly anti-US countries would not accept Ruth’s Chris and eat there

Hannah gathered information from several reliable U.S government and related websites and came up with the data to represent the variables related to particular countries. This included:

– per capita beef consumption

– population

– urbanization rate

– affinity to US brands

– high disposable income

– do people go out to eat

– per capita GDP etc.

2. What other, unused variables such as political, economic, financial, legal, ethical, and cultural factors might prove useful when assessing the attractiveness of particular international markets? Why?

Political stability should be added to the list of variables. An instable government could lead to problems for a Ruth’s Chris franchise in that country. The restaurant would go through a hard time get the proper clearance to set up operations, war could break out and a risk exists of the government or a new government power taking claim and repossessing the restaurant.

Culture issues would play a significant role when entering certain markets. Specifically in the middle east the use of Kosher or Halal process will be required to make sure that cultural sensitivities are accounted for.

Economic factor will always play a role in the expansion of the company since international expansion will need to be made in economically sound economies where consumers have disposable income to spend money

3. What would be your choice of top 5 countries? How did you reach your conclusion?

1. U.K.

The U.K. is a developed country with high standard of living. Their per capita GDP is $30,300 comparable to the U.S.A’s so they can afford the products at Ruth’s Chris and eat frequently. They have a high urbanization rate and have a stable economy, the sixth (PPP) largest economy in the world. They have high per capita beef consumption at 79.6 kg. They have little risk due to political stability, affinity for American brands, and similar eating habits.

2. Germany

For many reasons similar to the U.K’s. Germany has a high standard of living and their per capita GDP is $30,400, the largest national economy in Europe and ranked fifth by GDP (PPP) in the world. They have high per capita beef consumption at 82.1 kg. Affinity for U.S. brands in Germany is not as strong as the U.K.’s and if consumers can relate Ruth’s Chris to a well-known German brand or with a local subsidiary, it would ensure success.

3. Bahamas

It has high per capita beef consumption, second only to the U.S at 123.6. It possesses an urbanization rate at 89% and a per capita GDP at $20,200. It has a small population, but I believe its high level of tourist activity would compensate for that and also bring in money from tourists on vacation.

4. Dubai

Dubai’s per capita GDP is $42, 000. With its booming economy, the local population has high affinity to US brands and companies. It is also a major travelling hub as it sits in the middle of Far East Asia and Europe and thus has heavy visitor traffic.

5. Singapore

There is a growing affinity for Western-style products and way-of-living and it has potential to bring in strong revenues. Singapore has a per capita beef consumption of 71.1 kg with a population of around 4 million. Its urbanization rate is 100% which tops all countries and has a per capita GDP of $28,100. It has a highly developed market-based economy and is the 5th wealthiest country in the world in terms of GDP (PPP) per capita. It is the 3rd most expensive Asian city to live in so it falls in the market Ruth’s Chris caters to. Lastly, rival Morton’s has a restaurant there.

4. Hannah was focusing on franchising as his choice of entry. What other entry modes are there? What are the strengths and weaknesses associated with each mode of entry from Hannah’s perspective?

Other modes of entry include joint ventures (JV), licensing, exporting, and wholly owned subsidiaries (foreign direct investment). Only 3 of these are possible due to their industry – JV, FDI, and franchising. JVs help Hannah enter the market easier with local market knowledge and allies, less investment required, and more profit. JV’s weaknesses are difficult to manage, distance from headquarters, greater risk than franchising, and insider knowledge lost. FDI’s strengths include direct control over operations and brand and total profit, and its weaknesses are higher risk than other options, more commitment and resources and more difficult to manage. The last option franchising, the benefit’s includes less risk for Hannah, steady income, and brand growth and the disadvantages are less control, less profits, and loss of intellectual property.

5. What are some actual internal and external challenges Hannah will face when opening his restaurants abroad?

Hannah selects the beef-eating population. However, no concession made to regional taste for menu items. Even McDonalds changes its menu in other countries, so why is Ruth’s Chris so afraid? More importantly, would the risk of jeopardizing their core competencies through menu alteration outweigh the potential profit, this is the biggest internal challenge for them. Outsourcing USDA prime beef has to be expensive. Shipping it halfway across the world in freezers seems almost extravagant and inefficient. Could Ruth’s Chris evaluate local sourcing of their produce? It’s very important to think upon. External challenges could include the people’s reluctance towards American brand, high expenses on franchises than decided in agreement, political instability, lack in flexibility according to the situation: like people prefer to take beef-meals at lower prices or ever-changing consumer preferences can be the biggest external challenges.

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