MNC Financing
Reports
Multinational Corporations (MNC) are defined as firms that engage in some form of international business. Their managers conduct international financial management which involves international investing and financing decisions that are intended to maximize the value of the MNC. The goal of these managers is to maximize their firm’s value. The MNC objectives are to identify new markets to increase market share, invest excess cash, and ensure the soundness of any host country’s financial market. As the CFO you are asked to analyze the strengths and risk of a potential new market and prepare a report to present to the Board.
As an MNC you encounter Foreign Exchange Risk -Hedging
(a) Discuss the different options for hedge receivables and payables and recommend to your Board the best hedging strategy for the MNC. Be sure to qualify your recommendations and use examples.
(b) As an MNC when you would use the spot rate, discuss and use examples
(c) If the MNC currency’s in Mexico is weaker, how will it impact your investment (from question 2 BELLOW) and profits?
(d) Go to www.oanda.com Click on “Currency Tools”, then “Historical Currency Converters”, and “Currency Trends”. Explain how the home currency (Canada) has changed (compare with the host currency (Mexico) over the last three months and how will it impact the MNC’s business.
(e) Your company will need to repatriate revenue back home, which hedging strategy will you use and why?
United States Presidential candidate Hillary Clinton ran on the policy, “no bank is too big to fail”
(a) Explain the too-big-to-fail policy and how the policy is associated with asymmetric information problems?
(b) CDIC is in place to protect clients in the event of a failing bank.
a. Discuss its two-payout method
b. Financial experts have criticized the CDIC; discuss two of the primary arguments against the CDIC
c. What are two primary arguments for CDIC
d. Over the years CDIC has changed the ways it calculates its premium; explain the evolution over the past years. (the evolution of how premiums are calculated).
TO QUESTION 2:
Question 2: MNC Financing. The MNC will need financing to purchase the product or raw material new supplier.
Discuss the amount of financing needed.
The product Rossy plans to market must be identified before he begins to discuss how much money he needs. First off, Rossy is a $28 million corporation that is currently in operation. In order to create 500,000 retail locations in Canada after opting to launch a new product in the Mexican market, the company will require at least $3.5 million in finance (Berezkina, 2022) Rossy will require $2 million if the supplier sells retail goods at his $2.0 per item and takes other manufacturing costs, such as labor and factory setup, into account. There are other expenses, transportation, and promotions. Therefore, a budget of at least $3.5 million is appropriate.
Explain how you arrived at the amount and how it will be spent.
Approximately $1.5 million of that budget will be used for production costs. The business must then invest approximately $1 million in creating a product that is helpful, appealing, and marketable. Once True Earth had established a presence in the market and a sizable client base, additional product promotion would help it gain market share, leaving around half of the competition behind.
Explain the different options available for financing.
To get financing there are different options available –
Sample Solution
As an MNC, foreign exchange risk is an ever-present concern when dealing with international transactions. To counter this risk and ensure consistent margins, the company must implement a hedging strategy for both their receivables and payables. The two most common strategies used to hedge against currency fluctuations are forward contracts and options; each of which has its own advantages and disadvantages.
A forward contract is essentially an agreement between two parties to buy or sell a set amount of currency at a predetermined future date, thus allowing companies to lock in favorable exchange rates (Hull 9). While this approach provides some certainty around cash flows it also exposes firms to potential losses should the rate move in their favor; as such forward contracts may not be suitable for all businesses.
Alternatively, using option contracts could be beneficial since they provide greater flexibility than forwards. With options one can either exercise the right to purchase or sell a set amount of currency at prearranged conditions or allow them expire if no longer desired (Hull 11). This makes them ideal for companies who need greater control over their exposure due to unpredictable markets. Furthermore ,they can be customized according specific needs making them more cost effective than forwards certain cases ( Singh & Chaturvedi 290-295 ).
In conclusion, forward option contracts represent different approaches when it comes protecting oneself from foreign exchange risks. Whether company chooses use either depends greatly on type operations they handle financial capabilities so that best course action identified based on individual circumstances.( Prakash et al 56 -58 )
