The Global Financial Crisis and Multinational Corporations -
The global financial crisis from 2007-2011 produced adverse effects on multinational corporations (MNCs). Select a US based MNC and analyze its transaction, economic and translation exposures before and after the crisis. You are required to conduct a quantitative analysis to investigate how exchange rate movements affected the MNC's financial performance in the pm-crisis period (2002-2006), crisis period (2007-2011) and post-crisis period from 2012 to present.
Your paper should include the following:
1. Economic Exposure Measurement:
Using monthly price data, conduct a regression analysis to assess the MNC's economic exposure to fluctuations in exchange rate movements of two foreign currencies. Compare and contrast the results in the pre and post crisis period.
Hint: Dependent variable ⇒ Percentage change in stock prices.
Independent variable ⇒ Percentage change in exchange rate of foreign currencies.
2. Transaction Exposure Measurement:
Determine transaction exposure from currency variability.
Using direct quotes for the two currencies do the following:
a. Compute the standard deviation of exchange rates changes
b. Determine the correlation between the currencies and explain the significance.
c. Assuming an equally weighted portfolio, compute the portfolio's standard deviation and analyze its transaction exposure.
Measuring transaction exposure using volatility of dollar earnings
a. Assuming all transactions are invoiced in the two foreign currencies, compute the volatility in dollar earnings if the MNC receives a million of each currency annually.
Hint:
⇒ Dollar earnings = Direct Quotes X Earnings received in FC
⇒ Present findings on a graphs
⇒ Compute the standard deviation of the dollar earnings.
b. Combine the dollar value of the cash flows from both currencies and measure the portfolio's volatility.
c. Compute the standard deviation of the portfolio and analyze its transaction exposure.
d. Did diversification of businesses across two countries results in more stable cash flow movements? Explain.
3. Translation Exposure Measurement:
Compute and analyze the impact of translation exposure on exchange rate movements using the P/E valuation model.
Assume the subsidiary transmits ten million of the foreign currency to the parent per year and there are ten million shares outstanding.
⇒Get annual data of direct quotes for one foreign currency.
⇒Compute the Earnings Per Share (EPS).
⇒Get the average annual industry P/E ratios.
⇒Compute the company's stock prices
⇒Conduct an analysis of the impact of translation exposure on the company's intrinsic value (stock price) using the P/E valuation model.
Note:
a. P/E = Price/EPS
b. EPS = Total Earnings / Number of shares Outstanding
c. Total Earnings = Earnings in Foreign Currency remitted by the subsidiary to the parent x Exchange Rates
4. Review the company's annual report and summarize comments on economic, transaction and translation exposure.
5. Discuss the overall effects of exchange rate movements on the MNC before and after the crisis period and give recommends on strategies on the best way forward.
Your paper must also include the following sections following APA style:
1. Title: The title of your project.
2. Introduction:
a. Provide a brief background of the MNC selected (half page).
b. Give an overview of the 2007 -2011 Global Crisis (1-2 pages. Two pages maximum).
3. Body: Analyze the transaction, economic and translation exposures.
4. Conclusion
5. References: Include 5-8 credible sources.
6. Exhibit(s): Include the financial statements as well as other data used in the financial performance review as exhibit(s) after the reference page.
In addition to resources covered in the library instruction, you can also visit:
-Exchange rate data ⇒ https://www.oanda.com
-Annual reports of MNCs ⇒ www.annualreportservice.com
-Derivatives https://www.futuresmag.com/
-Evaluation of MNC's financial information: MNC's websites as well as finance websites (Yahoo finance, Google finance, and Reuters).
-Country risk ratings and analyses:
- www.moodys.com
- www.standardsandpoors.com
- www.fitchratings.com
-Economic outlook: www.imf.org Check out current World Economic Outlook data for the MNC's countries of operations.