Assignment:
Part 1. Running Your Own MNC
Estimating Cash Flows of an International Project
1. If you seriously considered whether to implement your international business idea, you would have to measure the costs and benefits of this idea. Describe how you would estimate the dollar revenue to be received from your business.
2. Describe how you would estimate the expenses associated with your business.
3. Describe how you would estimate the net cash flows (in dollars) of your business.
4. Explain why your estimate of the net cash flows (in dollars) could be overestimated.
Part 2.
Long-Term Debt-Denomination Decision
1. If you planned to borrow long-term funds, you could borrow dollars or you could borrow the foreign currency of concern. Using the Internet or other sources of data, compare the U.S. interest rate to the foreign interest rate over the last 8 quarters. Which interest rate is typically higher?
2. Explain why you might be able to reduce your exposure to exchange rate risk by borrowing long-term funds denominated in the foreign currency of concern.
Accessing Long-Term Interest Rates
Go to https://www.bloomberg.com and review the yields (rates) of foreign currencies. The long-term interest rates shown here reflect the government cost of borrowing, so an MNC would have to pay a slightly higher interest rate than the rate shown. What is the government's borrowing rate in your target country? Is the rate higher or lower than the government rate in the U.S.? What rate do you think you would have to pay if you borrowed funds in your target country?
Part 3
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 https://www.cme.com. Determine the prevailing futures price of the main foreign currency for your business. Go to https://www.oanda.com and determine the prevailing spot rate. What is the discount or premium of the futures price?
Part 4
Managing Cash
Given that you receive periodic payments in foreign currency for your exports, explain how you could effectively use cash management. That is, explain how you would use the funds as they are received. If you had some existing short-term debt, would you prefer to invest the cash in short-term securities or would you pay off the debt?
1 Given that your business has receivables in a foreign currency, you may want to consider financing in that same foreign currency to offset the exposure. Compare the recent interest rate of the foreign currency of concern to the U.S. interest rate: Is the foreign interest rate typically higher or lower than the U.S. interest rate? Would you use financing in that currency to offset receivables? Explain.
Explain how you could use foreign financing for your business in a manner that would reduce your exposure to exchange rate risk. Be specific.