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International Business Finance-Exchange rate

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For your job as the business reporter for a local newspaper, you are given the assignment of putting together a series of articles on the multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the foreign exchange markets by JGAR, a local firm that us the subsidiary of Daedlufetarg, a large German manufacturing firm. Your editor would like you to address several specific questions dealing with multinational finance. Prepare a response to the following memorandum from your editor:

TO; Business Reporter
FROM: Perry White, Editor, Daily Planet
RE: Upcoming Series on Multinational Finance

In your upcoming series on multinational finance, I would like to make sure you cover several specific points. In addition, before you begin this assignment, I want to make sure we are all reading from the same script, as accuracy has always been the cornerstone of the Daily Planet. I'd like a response to the following questions before we proceed:

1. What new problems and factors are encountered in international as opposed to domestic financial management?
2. What do the term arbitrage profits mean?
3. What can as firm do to reduce exchange risk?
4. What are the differences between a forward contract, a future contract, and options?

Use the following data in your response to the remaining questions:

Selling Quotes for Foreign Currencies in New York

Country-Currency Contract S/Foreign

Canada-dollar Spot 0.8450
30-day 0.8415
90-day 0.8390
Japan-Yen Spot 0.004700
30-day 0.004750
90-day 0.004820
Switzerland-franc Spot 0.5150
30-day 0.5182
90-day 0.5328

5. An America business needs to pay (a) 15,000 Canadian dollars (b) 1.5 million yen, and (c) 55,000 Swiss franc to business abroad. What are the dollar payments to the respective countries?
6. An American business pays $20,000, $5,000, and $15,000 to supplier in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive?
7. Compute the indirect quote for the spot and forward Canadian dollar Contract?
8. You own $10,000. The dollar rate in Tokyo is 216.6752. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set-up an arbitrage scheme with your capital. What is the gain (loss) in dollars?
9. Compute the Canadian dollar/yen spot rate from the data in the preceding table hide problem

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1. What new problems and factors are encountered in international as opposed to domestic financial management?
"International finance distinguishes itself from domestic finance due to exchange rate, cross border barriers and financing opportunities in the global market.
Foreign Risks: International trade and investment requires dealing with foreign currencies, receiving the foreign exchange in the future or paying the foreign exchange in the future, which exposes a company/investor to currency risk, which is the risk of an adverse exchange rate movement. Also, there are potential political Risks for multinationals making investments and doing business overseas. Building production facilities overseas is a long term investment. Political climate can change and present risks. It may be difficult to enforce a contract in a foreign country.
Market Imperfections/Barriers to Trade: Various frictions and impediments, such as protectionist legislation, dumping laws, trade restrictions, tariffs, quotas, etc. present threats and opportunities. Honda produces cars in the United States of America to circumvent trade protection against Japanese cars in the USA. Also there are differences in tax treatment across countries.

Expanded Opportunities: Multinationals have access to larger markets to buy/sell/produce products. Investors have access to an expanded set of investment opportunities which can result in reduced risk exposure and/or higher returns through international diversification.

2. What does the term arbitrage profits mean?

Arbitrage profit means riskless profit. One enters into two or more contracts simultaneously to benefit from price discrepancies to make riskless profit.

3. What can a firm do to reduce exchange ...

Solution Summary

Answers questions on international financial management, arbitrage profits, exchange risk, forward contract, future contract, options, exchange rate calculations.

See Also This Related BrainMass Solution

International Finance - Fresh Juices, Inc.


As a senior financial analyst for Fresh Juices, Inc., the largest fresh fruit drink company in the United States, you are a key player in corporate finance for the business. You are consulted on major capital projects, prepare analysis for executive officers, present material at senior management meetings, and play the overall role of advisor to executive and senior officers.

Fresh Juices, Inc. has witnessed its sales grow from US$1 million in the first year of operations in 1970 to US$1.5 billion last year. The company started as a regional supplier of fresh fruit drinks in California and initially expanded in the West. However, over the last 15 years, the company has moved further east, north, and south. Today, the company's lines of products can be found on the shelves of any major grocery store in the U.S., and its market share of fresh fruit drinks is 80% in the United States.

The Drive to Expand Internationally

On a recent trip to Canada and Latin America, Hector Vasquez, the company's chief executive officer (CEO), noted the lack of fresh fruit drinks in the supermarkets. When he returned, he brought in all of his senior officers and said, "I want to be international in a year. We have a great product, and I think we can compete effectively in North and South America, Europe, and Asia. My recent travels confirmed my suspicion that fresh fruit drinks like ours do not exist outside the U.S.," he said. "Furthermore, with the U.S. market growing at 2% annually, we need to find other markets that have the potential to grow at a faster pace."

Mr. Vasquez asked your boss, Bonita Galloway, to head up the team to do the analysis on international opportunities and report back to him in the coming weeks. With that, he dismissed the meeting, and the senior officers left.

The Meeting

The U.S. business was so mature and was not growing rapidly, so Ms. Galloway thought international expansion might be just what the company needed. She was concerned that the company's profit margins would start to be squeezed in the company years if the firm did not find other sources of revenue growth. This would force the company to make drastic cost cuts and could potentially impact Fresh Juices' ability to compete.

Given your role in the organization, Ms. Galloway immediately thought of you as the finance lead on this project. She called you to her office to discuss what happened at the meeting with Mr. Vasquez.

After briefing you, she said, "I want you to be the primary contact on this. I will need you to work closely with the various departments that will be involved with this effort. Specifically, I need to lean on your analytical capabilities because we need to make objective decisions. I need you to give me the facts-not what you think I want to hear. This is important to the future of the company. I know I can count on you."

Task Name: Phase 3 Discussion Board
Deliverable Length: 4-6
Details: One senior officer believes the best way to manage exchange rate exposure is to do nothing. She believes that currencies are unpredictable. She believes trying to manage currency risk is useless and a waste of money because of this unpredictability. She writes you an e-mail stating her position and asked you for your thoughts.

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