Share
Explore BrainMass

Current Account Deficit Run by the U.S

Select a U.S. multinational company. In terms of currency denomination, discuss how the firm prices its revenues and costs. For MNE's with multiple foreign operations, consider any one of those operations and the contribution it is making to the parent firm's profits. What means does it use to hedge against exchange rate risk? Using this information, what do you think would be the effect of increases/decreases in the dollar's exchange value on the firm's profitability? Be sure to show all applicable work.

Instructor Comments:

An MNE is a multi-national enterprise, a company that has operations in more than one country. When a such a company prices its product, receives its revenues, denominates its costs, and pays its workers and suppliers in terms of US dollars , there is no effect on its revenues or costs when exchange rates change. But when prices and costs are in terms of foreign currencies, an MNE's revenues and costs are affected by exchange rate changes. So select the company, describe its activities. State whether it prices its products in $ or a foreign currency. State whether it pays its suppliers and workers in the currency of the foreign country or dollars.

Assuming that it pays its workers and suppliers in the foreign country's currency , and receives the foreign currency in payment from its foreign customers, what would happen to the company's revenues, costs and profits if the foreign currency appreciated ? Explain.

What would happen to the company's revenues, costs and profits if the foreign currency depreciated ? Explain.

***********************************************************************

The media and others suggest that the current account deficit run by the U.S. is a problem for the economy. What do you think? What action(s) would you advise federal government officials to take on this issue? Be sure to define and explain what the Current Account Deficit is.

Solution Preview

McDonald's Corporation is the world's largest chain of fast food restaurants, serving nearly 47 million customers daily. McDonald's is the leading global foodservice retailer with more than 32,000 local restaurants serving more than 60 million people in 117 countries each day. More than 75% of McDonald's restaurants worldwide are owned and operated by
These restaurants serve a varied, yet limited, value-priced menu in more than 117 countries around the world. The northernmost McDonald's restaurant is located on the Arctic Circle in Rovaniemi, Finland, while the southernmost franchise is located in Invercargill, New Zealand. Also, the world's easternmost McDonald's is located in New Zealand, in the city of Gisborne; the westernmost restaurant is in Western Samoa. It is having more than 4000000 employees, Capital ( debt and equity) (Assets are of $30 billion) , Sales of more than $22 bn and Profits of more than $4 bn. McDonald is operating into many countries and hence it's some of the revenues and costs are denominated in foreign currency. McDonald's business is managed as distinct geographic segments. Significant reportable segments include the United States (U.S.), Europe, and Asia/Pacific, Middle East and Africa (APMEA). In addition, throughout this report we present "Other Countries & Corporate" that includes operations in Canada and Latin America, as well as Corporate activities. The U.S., Europe and APMEA segments account for 35%, 41% and 19% of total revenues, respectively.

International Risk factors affecting McDonalds

Country risk is a collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk. (Investopedia, 2010) International diversification will reduce the unsystematic risk related to a particular country.

One of the prominent factors affecting country risk is the political factors. Political Risk is the risk that an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers, or military control. (Investopedia, 2009) For example World is greatly affected by terrorism in the recent times. This may have adverse affect on the business. Organizations can be greatly affected by political instabilities of various economies in which it's operating. It has to manage the legislation and accessibility initiatives. Moreover it has to manage the patent, copyright, trademark and trade secret laws of that ...

Solution Summary

The solution talks about how McDonald's pays suppliers and workers in foreign currencies and how its revenues and profits would be affected by exchange rate change. An explanation of the current account deficit is also given. 1527 words with many references throughout.

$2.19