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Choose a country (not the United States or Canada) and post your country choice in the discussion area. Then, identify some political and currency risks of that country and discuss why a U.S. company would invest (for example, build a factory) in that country. Also discuss some of the various international finance topics such as the foreign exchange market, purchasing power parity, interest rate parity, cross rates, and so on. Why is it important for international firms to understand these concepts?

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Reid Wolff
Reid WolffLv2
28 Sep 2019
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International Finance and Political Risk

Choose a country (not the United States or Canada) BRAZIL is the Country . Then, identify some political and currency risks of that country and discuss why a U.S. company would invest (for example, build a factory) in that country. Also discuss some of the various international finance topics such as the foreign exchange market, purchasing power parity, interest rate parity, cross rates, and so on. Why is it important for international firms to understand these concepts?

Choose a country (not the United States or Canada) that has not already been chosen by another learner and post your country choice in the discussion area. Then, analyze some of the political and currency risks of that country and discuss why a U.S. company would invest (for example, build a factory) in that country. If you were in a decision-making position, what are the three for four specific factors that you would take into consideration?

Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its operations and sales to the United States; but its CEO, George Gaynor, wants to expand into the Pacific Rim. The first step is to set up sales subsidiaries in Japan and Australia, then to set up a production plant in Japan, and finally to distribute the product throughout the Pacific Rim. The firm’s financial manager, Ruth Schmidt, is enthusiastic about the plan, but she worries about the implications of the foreign expansion on the firm’s financial management process. She has asked you, the firms most recently hired financial analyst, to develop a 1-hour tut0rial package that explains the basics of multinational financial management. The tut0rial will be presented at the next board of directors meeting. To get you started, Schmidt has given you the following list of questions.

a. What is a multinational corporation? Why do firms expand into other countries?

b. What are the five major factors that distinguish multinational financial management from financial management as practiced by a purely domestic firm?

c. Consider the following illustrative exchange rates:

U.S. Dollars Required to Buy One Unit of Foreign Currency

Japanese yen 0.009

Australian dollar 0.650

1. Are these currency prices direct quotations or indirect quotations?

2. Calculate the indirect quotations for yen and Australian dollars.

3. What is a cross rate? Calculate the two cross rates between yen and Australian dollars.

4. Assume that Citrus Products can produce a liter of orange juice and ship it to Japan for $1 75. If the firm wants a 50% markup on the product, what should the orange juice sell for in Japan?

5. Now assume that Citrus Products begins producing the same liter of orange juice in Japan. The product costs 250 yen to produce and ship to Australia, where it can be sold for 6 Australian dollars. What is the U.S. dollar profit on the sale?

6. What is exchange rate risk?

d. Briefly describe the current international monetary system. What are the different types of exchange rate systems?

e. What is the difference between spot rates and forward rates? When is the forward rate at a premium to the spot rate? When is it at a discount?

f. What is interest rate parity? Currently, you can exchange 1 yen for 0 0095 U.S. dollar in the 30-dayforward market, and the risk-free rate on 30-day securities is 4% in both Japan and the United States. Does interest rate parity hold? If not, which securities offer the highest expected return?

g. What is purchasing power parity (PPP)? If grapefruit juice costs $2 a liter in the United States and purchasing power parity holds, what should be the price of grapefruit juice in Australia?

h. What effect does relative inflation have on interest rates and exchange rates?

i. 1. Briefly explain the three major types of international credit markets.

2. Briefly explain how ADRs work.

j. What is the effect of multinational operations on capital budgeting decisions?

k. To what extent do average capital structures vary across different countries?

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