Case on the Multinational Corporation Global OperationChapter Writing

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¶ … Operations of Multinational Corporation

Multinational Corporation is a concept that describes a corporation operating in two or more countries. In other words, multinational corporations distribute to consumer globally and they control a large number of network and control large number of global technology, productive resources and marketing. Firms invest in another countries because of the following reasons:

To seek for new markets.

To seek for new source of raw materials.

To gain access to new technologies.

To seek and gain production efficiency.

To avoid regulatory and political obstacles and hurdles.

To diversify in order to reduce the risks of market loss.

b.

Major factors that differentiate financial management of a multinational corporation from the financial management of a domestic firm are as follows:

Difference in currency denominations.

Legal and Economic ramifications.

Cultural differences.

Language differences.

Role of governments.

Political risks. (Madura, 2012).

These factors have complicated the financial management of Multinational Corporation because of the financial risks faced by multinational firms. However, prospect of high financial returns make multinational corporations to accept these risks and learn a strategy to manage them.

C.

(1) Since the price foreign currency is expressed in dollars, they are expressed in direct quotations.

(2) An indirect quotation refers to number of foreign currency units used to purchase one U.S.

Dollars. The indirect quotation is an opposite of direct quotation. The indirect quotation for kronor is $0.1189 because one Krona can buy 0.1189 dollars.

(3) Calculation for the indirect quote for Euro and direct quote for krona as follows:

Units of Foreign

Currency per $U. S

Euro

0.800

Swedish krona

6.7522

(4) A cross rate is an exchange rate that occurs between two currencies. A cross rate can be calculated based on various currencies with relative to the American dollar.

(5) The jerky will be sold in France for 2.10 Euro based on the following calculation.

Target Price =

$1.75

x

1.5

Target Price =

$2.63

French Price =

$2.63

x

0.8000

euros/$

French Price =

2.10

euros

(6) Cross rate between euros and kronor is as follows:

Cross Rate =

kronor x

Dollars

Dollar

Euro

Cross Rate =

6.7522

x

1.2500

Cross Rate =

8.4403

Kronor/Euro

Cross Rate =

Euros

x

Dollars

Dollar

Krona

Cross Rate =

0.8000

x

0.1481

Cross Rate =

0.1185

Euros/Krona

Alternatively

Cross Rate =

8.4403

Kronor/Euro

Cross Rate =

0.1185

Euros/Krona

The dollar profits are as follows:

2,0

euros =

2.0

x

8.4403

kronor/euro

2,0

euros =

16.88

kronor kronor profit =

20

16.88

kronor profit =

3.12

kronor

Dollar profit =

3.12

x

0.1481

dollars/krona

Dollar profit =

$0.46

(7)

An exchange rate risk refers to the value of cash flow in one currency that is translated in another currency, which will decline because of a change in an exchange rates. For example, when Kronor is strengthened in foreign exchange market, it would weaken the U.S. dollar.

d.

The current international monetary system is operated using a floating rate system. However, before 1971, the fixed exchange rates was in operation because the U.S. dollar was tied to the gold while other foreign currencies were tied to the U.S. dollar.

e.

A currency is convertible when an issuing currency has promised to redeem a currency at the current market rates. Typically, the convertible currencies are traded in the global currency markets. However, multinational companies will find challenges to conduct business in a country, which its currency is not convertible because there is no way the multinational company can take the profits out of the country.

f.

A spot rate refers to the rate that is applied to buy currency for an immediate delivery. However, a forward rate refers to the rate that is applied to buy currency at an agreed future date. If the U.S. dollar is able to buy fewer units of an international or foreign currency within the forward market than the spot market, in this case, the foreign currency is sold at premium. The foreign currency is sold at a discount in the opposition situation. A foreign currency is sold at a discount if the U.S. dollar is able to buy fewer units of an international or foreign currency within the spot market than forward market.

g.

The interest rate parity refers to a situation where investors expect to earn the same returns of similar risk securities in all countries using the following calculation:

Actual Forward Rate =

1,2500

Annual… [END OF PREVIEW]

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