Problem:
Select a U.S. multinational company. In terms of currency denomination, discuss how the firm prices its revenues and costs. For MNE's with multiple foreign operations, consider any one of those operations and the contribution it is making to the parent firm's profits. What means does it use to hedge against exchange rate risk? Using this information, what do you think would be the effect of increases/decreases in the dollar's exchange value on the firm's profitability? Be sure to show all applicable work.
Instructor Comments:
An MNE is a multi-national enterprise, a company that has operations in more than one country. When a such a company prices its product, receives its revenues, denominates its costs, and pays its workers and suppliers in terms of US dollars , there is no effect on its revenues or costs when exchange rates change. But when prices and costs are in terms of foreign currencies, an MNE's revenues and costs are affected by exchange rate changes. So select the company, describe its activities. State whether it prices its products in $ or a foreign currency. State whether it pays its suppliers and workers in the currency of the foreign country or dollars.
Assuming that it pays its workers and suppliers in the foreign country's currency , and receives the foreign currency in payment from its foreign customers, what would happen to the company's revenues, costs and profits if the foreign currency appreciated ? Explain.
What would happen to the company's revenues, costs and profits if the foreign currency depreciated ? Explain.
The media and others suggest that the current account deficit run by the U.S. is a problem for the economy. What do you think? What action(s) would you advise federal government officials to take on this issue? Be sure to define and explain what the Current Account Deficit is.