BSB119 L W10

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Department
Management and Human Resources
Course
BSB119
Professor
All Professors
Semester
Spring

Description
BSB119 – GLOBAL BUSINESS LECTURE 10: FOREIGN EXCHANGE AND INTERNATIONAL BUSINESS OUTLINE 1. Issues confronting IB with foreign exchange and payments 2. Foreign exchange market – functions and rates 3. XR risk exposures and management 4. IB payment systems Focus Questions  What factors influence the exchange rate of a currency?  To what exchange rate risks are international firms exposed?  What strategies can IB use to manage these risk exposures?  Why is there a need for a trusted third party in IB transactions?  In terms of costs and risks is a letter of credit payment system more beneficial to the exporter or importer? Issues Confronting International Business  Foreign currency exchanges – risk exposures and management o As rates change, the price competitiveness of goods also changes. o Most critical variable in international business o To undertake FDI, a business must buy foreign currency to move capital into the country or sell foreign currency to repatriate profits  How to ensure payment is received for the goods?  Lack of trust - dealing with a stranger at a distance – consider the impact of different factors including geography, cultural, legal systems  Difficulty of enforcing contractual obligations across borders – how can this be done? Under which jurisdiction does the contract fall?  Competition – e.g, losing business to competitors who sell on open accounts Exchange Rate Movements  Future cash flow projections, profitability, competitiveness and the ability to service debt can all be impacted by foreign exchange volatility when paying or receiving foreign currency.  All businesses trading overseas and increasingly in domestic markets, will have some exposure to exchange rate movements either directly or indirectly. o Level of exchange rate and variability should be monitored o Unexpected changes are a risk to the profitability of international trade and investment as is instability in the international monetary system Foreign exchange market: includes interbank market and securities exchange International Financial Markets International capital market: include sthe bond market, the equities market and the euro currency market Driza-Bone Video – IMPORTANT FOR TUTORIAL HW  Australian company – national brand o Australian icon o Reflects our personality  A weather proof oil-skin coat designed for horse riders  CEO came over in 1989 – English company bought Dizza-bone to caretake the company. English company bought it for the brand name o Left to his own devices to control the business  Adopted an entrepreneurial approach – very successful in the first 7/8 years  Was not covering all of Australia o Opened up to sell to all of the nation  Big country with a limited population. Unless you can sell to all of them, the market is very limited  Expanded to NZ – initial exporting attempt.  Learnt a lot of lessons – easy first market because same legal structure and interpretations o Developed business a lot there o Developed a strong service ethic and delivery on time ethic o Listen to what the customer wants o The entity works in NZ$ - Drizza-bone takes the currency risks  People ask to sell it in other countries a great deal – considered the ones who were small and were passionate about the product/brand  Successfully started exporting to the UK, US, South Africa and Japan  All manufactured here and manufactured there  Built up from $0 in 1989 to $6/7m in 1997. This placed the company in the top 500 Australian exporters at the time  1997: major problem with exporting was currency.  Currency movement is the most difficult part of exporting  At the time, the Australian dollar was appreciating against the worlds currencies  Impact of AU$ is huge due to the movement which has occurred – moved from 48c US to $1+  Very difficult to hedge cash flows – provides a great deal of uncertainty  This destroyed the company margins  Also negatively impacted cash flow – increased transport and duty costs  Tariffs would not have impacted or protected against this  The most understated and difficult and potentially disastrous area which is largely ignored  Companies should be looking to hedge cash flows based on external advice regarding where their cash flows should be.  Significant part of the business became unprofitable – losing money in the US and UK  Incurred a significant amount of debt – owners of the business felt it had become unmanageable  Fired the managing director  Tools in the market today (which were not available in 1997) are far more deeper which allow for longer hedges.  Driza-bone expecting income in to hedge their position in cash flows for the next 12/18 months. Today, hedging can be done for 4/5 years.  You are anticipating cash flow to come in, in a few years time, if you do better you will be over hedged but if you do worse, you will be under hedged  Need to seek financial advice regarding what cash flows you are seeking to hedge  Company was sold  Investment company purchased it and they re-hired the former director  Company reduced management structure, number of meetings and time spent on meaningless discussion which helped  Encouraged people to provide solutions to issues  Management team is much younger  Increased marketing – used in the Sydney 2000 Olympics  Sought to diversify product line  Broaden the range of domestic products to provide more balance  Sponsorship is a very effective tool – worked with sporting teams  Company attitude has changed  Use short-term contracts of work because companies close down regularly, more economic driven and adopt global business attitudes  Everything is international – everything is fast paced  Crucial to be efficient and productive. You need to be the best.  You cannot rest on your laurels  Great export opportunities for Australian products. Products provided need to be in the top quarter of the market – very difficult to achieve.  2 choices for exporters: differentiate your product (differentiate yourself from the global market and move forward) or be a low cost provided (high turnover). Decide which end of the spectrum you are.  Company has been adapted to meet the demands of the area being worked in. When products sold in America – adopt their sizing rules. US zips are on the other side for males.  Different advertising, presentation and what is given at trade shows. Buyers are given multiple options. There are many competitors for Drizza-Bone in the clothing industry but also, in the electronics industry because of the significant amount of money consumers spend on these factors.  Message: not buying a jacket, you are buying a shirt. The product needs to have meaning to your life.  The company needs to be versatile – product range now includes mobile phone pockets. The company also makes raincoats for dogs – look outside the square to survive.  Always a benefit to learn about the country  Garmets are now sourced from China – it is accepted that companies have to source goods from different areas.  Emphasis on design Overseas expansion  Started to export to New Zealand.  Learnt a lot of lessons – NZ is easy because the law is the same  Developed business there – developed a strong delivery on time ethic  Decided to work in NZ$  Did not assist that everything should be converted and then take a currency risk  Strength of the product: people ask if they can sell it in their country a lot  Considered the country and tended to take on small companies with people who were very interested in the brand.  Resulted in successful exports in the UK and US and now, South Africa and Japan  Built up from nothing in 1989 to $6m in 1996/7 – top 500 Australian exporters  Small company in global terms Currency movement  1997: major problem is currency movement - most difficult management problem  AU$ appreciated against all the world’s currencies  Exporting to Germany and the currency was increased by 10% / month  Crucial factor – impacting on imports and exports  Difficult to hedge position due to significant growth. Provides a great deal of uncertainty when trying to manage cash flows  This destroy’s product margins and cash flow  Tariffs provide protection – currency has moved 100% in the past year. No tarrif will provide against this.  Most understated difficult and potentially disastrous area which is ignored.  Company should be looking to hedge some of cash flows – based on external advice  Driza-bone incurred a significant amount of debt due to the changes  IN 1997, they fired the CEO  Foreign Exchange Market  Market where currencies are bought and sold and the exchange rate is determined  Market for converting currency o Market never sleeps  Exchange rate: rate at which once curren
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