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International Business: Import & Export Product, Exchange Rates

You are the international manager of a US business that has just invented a revolutionary new personal computer that can perform the same functions as PCs, but costs only half as much to manufacture. Your CEO has asked you to decide how to expand into the European Union market. Your options are to export from the United States to license a European firm to manufacture and market the computer in Europe to set up a wholly owned subsidiary in Europe. Evaluate the pros and cons of each alternative and suggest a course of action to your CEO

Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the United States is $2.80 per pound and in Britain it is ₤3.70 per pound. According to PPP theory, what should the dollar/pound spot exchange rate be? Suppose the price of beef is expected to rise to $3.10 in the United States and to ₤4.65 in Britain. What should the one-year forward dollar/pound exchange rate be? Given your answers to parts a and b, and given that the current interest rate in the United States is 10%, what would you expect the current interest rate to be in Britain?

You manufacture wine goblets. In mid-June you receive an order for 10,000 goblets from Japan. Payment of ¥400,000 is due in December. You expect the yen to rise from the present rate of $1 = ¥130 to $1 = ¥100 by December. You can borrow yen at 6% a year. What should you do?

You are CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take?

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ANSWERS

Case 1
Export from the United States
This alternative will expose the company to higher foreign currency risk exposure. Inputs and other expenses will be paid in US dollars while revenues are denominated in euro. However, this alternative gives the strongest control for the company as regards production.

License a European firm
This option though also faces foreign currency exposure it is relatively less than that of the first option. Expenses related to the product will be paid for by the licensee while revenues will be in euro. This option also entails virtually no additional investment for the company.
However, this option opens other risks such as the risk that the company's product will be pirated and copied more easily as it has no control over how the licensee will ...

Solution Summary

This solution of 549 words addresses the four cases on international business and topics such as import/export, exchange rates, foreign currency and borrowing. It gives recommendations in each case and justifies why.

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