Finance Minicase Essay

MINI CASEFor your job as the business reporter for a local anesthetic newspaper, you be asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the distant supersede markets by JGAR, a local loyal that is the subsidiary of Daedlufetarg, a outsized German manufacturing firm.Your editor would like you to address close to(prenominal) specific questions transaction with multinational finance. Prepargon a retort to the following memorandum from your editorTo phone class ReporterFrom Perry White, Editor, Daily PlanetRe Upcoming serial publication on Multinational FinanceIn your upcoming series on multinational finance, I would like to make certain(p) you cover several specific points. Before you begin this assignment, I want to make sure we are all reading from the selfsame(prenominal) script beca ingestion accuracy has eer been the cornerstone of the Daily Planet. Id like a response to the following questions before we proceeda. What new problems and factors are encountered in international, as opposed to domestic, financial management?When getting into international finance more or less problems and factors are added to the ones experienced within domestic finance. These problems come from exchange arrange, bounce back border barriers and financing opportunities in the global market but they do non get rid of the typical Business and Financial Risks. Business Risks derriere be identified as the ones that come out with contention from early(a) companies, reduction in sales or any other factor that may affect the activities of the MNC, and Financial Risk is related with the firms financial structure.The international trade and investment of a MNC requires the intervention of foreign currencies which is sometimes translated as an Exchange Rate risk out-of-pocket to the volatility of the exchange rate. Added to this exc hange risk, Multinational Companies deals with Political Risks due to the ever-changing political systems of different nations among their legal resolutions, taxation procedures of movements in policies.b. What does the term trade profit mean? trade profit means riskless profit, this is come-at-able thanks to merchandiseurs who are individuals involved in the process of buying and marketing in more than one country to achieve this riskless profit.c. What can a firm do to reduce exchange risk?In order for a firm to reduce its exchange risk some firms use onward-market and money-market hedges, nonetheless when these tools are not available MNC apply leaders and lagging strategies which are practiced to defer income and thereby clutches pay taxes and to create unhedged positions in order to speculate cash managers may delay paying out currencies they expect to appreciate and accelerate paying out currencies they expect to depreciate.d. What are the differences among a forward c ontract, a futures contract, and options? Forward contracts are agreements between two parties where the buyer agrees to purchase an asset (the foreign currency) and the trafficker agrees to sell the asset at a specific date at a price agreed upon now. Futures contracts are similar but are standardized and traded on an organized exchange. Options offer the buyer the right, but not the obligation, to buy or sell an underlying asset (the foreign currency) at a fixed price up to or on a specific date.Use the following data in your responses to the remaining questionsmerchandising Quotes for Foreign Currencies in New YorkCOUNTRY-CURRENCY CONTRACT S/FOREIGN Canada-dollar limelight .8450 30-day .8415 90-day .8390 Japan- pine away Spot .004700 30-day .004750 90-day .004820 Switzerland-franc Spot .5150 30-day .5182 90-day .5328 e. An American business needs to pay (a) 15,000 Canadian dollars, (b) 1.5 million yen, and (c) 55,000 Swiss francs to businesses abroad. What are the dollar payments to the respective countries?We go out use spot rates for calculations since time of payment is not specified.Canadian-dollar 15,000 = $12,675 USD = 15000 x0.845Japan-yen 1,500,000 = $7,050 USD = 1500000 x0.0047Swiss francs 55,000 = $28,325 USD = 55000 x0.515f. An American business pays $20,000, $5,000, and $15,000 to suppliers in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive?Japan = $20,000/0.0047 = $4,255,319 wasteSwitzerland= $5,000/0.515 = $9,709 Swiss francsCanada= $15,000 /0.845 = $17,751 Canadian dollarsg. Compute the indirect quote for the spot and forward Canadian dollar contract.The indirect quote indicates the number of units of a foreign currency that can be bought for one unit of the home currency. substantiating quote = foreign currency / home currencyContract S/ foreign Spot .8450 30 eld .8415 90 days .8390 validatory quote pic $ Spot pic = 1.1834 Forward 30 days pic = 1.1883 90 d ays pic= 1.1918 h. You own $10,000. The dollar rate in Tokyo is 216.6752. The yen rate in New York is given in the previous tabularize. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the forgather (loss) in dollars?Data $10,000 dollars vaulting horse rate in Tokyo is $216.6752 yen per dollar Yen rate in New York according to table 1 yen /0.004700 dollar substantial Yen rate in Tokyo 1 yen/ 0.004615 dollarArbitrage profits will be possible because the indirect rates are out of line (they are different). This is possible assuming no transaction cost.$10,000 dollars X 216.6752 = 2,166,752Arbitrage schemeAmount of money in yens = $2,166,752 Table rate Actual Rate 0.004700 0.004615 Amount dollars= $10,183.7344 Amount dollars= $10,000 Difference= $183.7344 Difference= $0.00 (2,166,752 yen ) X (0.004700) = $10,183.7344 dollars(2,166,752 yen) X (0.004615) = $10,000.00 dollarsProfit gain= $10,183.7344 dollars $10,000.00 dollars= 183.7344 Profi t gain= $ 183.7344 dollarsi. Compute the Canadian dollar/yen spot rate from the data in the preceding table.Canadian dollar sign/ U.S. Dollar Rate 1 / .8450 = 1.1834Yen/ U.S. Dollar Rate 1 / .004700= 179.78As we can see 1.1834 Canadian Dollar is equal to 1 American Dollar meanwhile 212.76 Yen is the same that 1 American Dollar, it means that for each 212.76 Yen you have 1 American Dollar.