...What implication do fluctuations in foreign exchange rates have on the pricing decisions of export marketing managers? Globalization is no longer an abstraction but a stark reality that virtually all firms, large and a small, face. Firms that want to survive in the 21st century must confront all encompassing force that pervades every aspect of business. However, exchange rate fluctuation is an issue that affects the decisions marketing managers make about pricing. Management faces different decision situations, depending on whether currencies in key markets have strengthened or weakened relative to the home country currency. If the home country currency is weakened this would be an opportunity as exchange would be in a favourable position. A producer in a weak-currency country can choose to cut export prices to increase market share or maintain its prices and reap healthier profit margins. When revenues are translated into home country, the returns would be substantial. On the other hand it is a different situation when a company’s home currency strengthens, management would see this as unfavorable for exportation as overseas revenues would be reduced when translated to home country currency. Management in making there decision must consider currency fluctuation even though the degree of exposure varies among companies. In an example, Honda is heavily dependent on the North American market, which accounts for more than half of its operating income. In trying to reduce currency...
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...issues associated with global organisations: i. Cultural differences and their impact on management controls. ii. Transfer pricing and related issues in multinational corporations. iii. Effects of exchange rates on multinational corporations and control system design issues. ACCG330 Strategic Management Accounting Session 1, 2012 1 Nature of Multinational Corporations (MNCs) • What is a Multinational Corporation? – A corporation that owns and operates production facilities in two or more countries. OR – A corporation with power to coordinate and control operations in two or more countries without owning them. • Typically have Headquarters in the country of origin • Build or acquire affiliates or subsidiaries in other countries (the host nation) ACCG330 Strategic Management Accounting Session 1, 2012 Basic Structures of MNCs • A number of basic structures exist that permit an MNC to operate and compete internationally – Structure must meet the need of both the local market and the home-office strategy of globalization – Basic structures of MNCs: • Domestic structure plus foreign subsidiary, or with an: a) International division b) Export department • Global product (divisional) structure, or Functional structure • Global geographic (area) structure ACCG330 Strategic Management Accounting Session 1, 2012 2 Domestic Plus Foreign Subsidiary Global Product Division Centralization vs Decentralization in MNCs ACCG330 Strategic Management Accounting...
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...International Business & Economics Research Journal Volume 3, Number 3 Effects of Exchange Rates On International Transfer Pricing Decisions Canri Chan (E-mail: canri.chan@miis.edu), Monterey Institute of International Studies Steven P. Landry (E-mail: steve.landry@miis.edu), Monterey Institute of International Studies Terrance Jalbert (E-mail: jalbert@hawaii.edu), University of Hawaii at Hilo Abstract Events leading to the passing of the Sarbanes-Oxley Act have led to increased concern with and scrutiny of potential management manipulation of financial statements. From an agency theory perspective, managers have incentives to manipulate organizational methods and choices in order to produce financial statements that those managers believe will maximize their incentive compensation. Transfer pricing represents one possible choice that managers can manipulate. This paper investigates whether exchange rates affect transfer pricing particularly as it relates to maximizing overall corporate profitability. The effects of taxes and government regulations have been explored in considerable depth in the transfer pricing literature. However, while transfer prices should also be affected by exchange rates in predictable ways, this variable has received comparably little attention in the literature. Inclusion of exchange rates in an analysis of transfer pricing and corporate profitability presents an opportunity to add to the literature. We conducted an experiment to examine how...
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...Executive Summary With the world demand for oil and gas is increasing and likely to increase further and as a developing country creating a best way to produce oil and gas to the unlimited demand. Petroliam Nasional Berhad(PETRONAS) has decided to analyse its business venture in three different countries all over the world. The countries are United States, China and Russia. Investing in international country may give out some financial risk. This paper is discussing the method Petronas can use to overcome all the financial risk in United States, China and Russia. A study on the derivative market of all the three countries is done to measure the risks and to know the ways to overcome the risks. Besides, this paper also discusses the taxation of every each country and how Petronas can minimize the tax burden. At the end of this paper, a conclusion is made (based on the criteria mention above) to which country to invest with different proportion. 1.0 Company Background and Risk Profile 1.1 Introduction to Oil and Gas industry in Malaysia Malaysia is one of the largest net exporters of oil and gases its region and the world. They have many gas and oil deposits on land and in the oceans surrounding the country. The country produces almost 2% of the world’s natural gas and nearly 13% of the world’s liquefied natural gas (LNG) and is ranked 25th in oil production in the world producing more than 750,000...
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...-21 (revised) OFFICE OF INDUSTRIES WORKING PAPER U.S. INTERNATIONAL TRADE COMMISSION How Do Exchange Rates Affect Import Prices? Recent Economic Literature and Data Analysis Cathy L. Jabara Office of Industries U.S. International Trade Commission Revised, October 2009 Cathy Jabara is a Senior Economist with the Office of Industries of the U.S. International Trade Commission. Office of Industries working papers are the result of the ongoing professional research of USITC Staff and are solely meant to represent the opinions and professional research of individual authors. These papers are not meant to represent in any way the views of the U.S. International Trade Commission or any of its individual Commissioners. Working papers are circulated to promote the active exchange of ideas between USITC Staff and recognized experts outside the USITC, and to promote professional development of Office staff by encouraging outside professional critique of staff research. This paper is a revised version of Working Paper No. 21 dated May 2009. The paper has been updated to include 4 lags in the exchange rate estimation, instead of 3, and a new equation for Latin America is included. JEL codes: F10, F12 Key words: Exchange rates, pass-through, U.S. imports Address correspondence to: Office of Industries U.S. International Trade Commission Washington, DC 20436 How Do Exchange Rates Affect Import Prices? Recent Economic Literature and Data Analysis Cathy L. Jabara U.S. International...
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...Pricing to Market and the Real Exchange Rate Author(s): Hamid Faruqee Reviewed work(s): Source: Staff Papers - International Monetary Fund, Vol. 42, No. 4 (Dec., 1995), pp. 855-881 Published by: Palgrave Macmillan Journals on behalf of the International Monetary Fund Stable URL: http://www.jstor.org/stable/3867601 . Accessed: 22/02/2013 10:54 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. . Palgrave Macmillan Journals and International Monetary Fund are collaborating with JSTOR to digitize, preserve and extend access to Staff Papers - International Monetary Fund. http://www.jstor.org This content downloaded on Fri, 22 Feb 2013 10:54:55 AM All use subject to JSTOR Terms and Conditions IMFStaffPapers Vol. 42, No. 4 (December1995) © 1995International Fund Monetary Pricing to Market and the Real Exchange Rate HAMID FARUQEE* Thispaper investigates the consequences of pricing to marketfor exchange ratepass-through and real exchange rate dynamics across differentpatterns of trade. Under two-way, intraindustrytrade-where...
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...8 Chapter 17 Questions 5, 6 Chapter 9 Questions 1, 2, 4, 5, 6, 7 Chapter 17 Questions 5. What does it mean for a tax code to be convex? If a country’s corporate tax rate is flat, does it make sense for a firm to hedge? Answer: A convex tax code imposes a larger tax rate on higher incomes and a smaller tax rate on lower incomes. If a country’s tax rate is flat, a key question is how losses are treated. If losses are subsidized immediately at the same rate that gains are taxed, there is no tax advantage to hedging. But, losses are usually not subsidized, as losses are typically only allowed to be deducted against future income. These tax-loss carry-forwards usually do not grow with the time value of money; nor are they indexed to inflation. Thus, the subsidy associated with a loss is less than the tax associated with a profit, and the tax code is effectively convex. There are also other legitimate reasons to hedge that are not tax related. 6. If the tax code is convex and the forward rate equals the expected future spot rate, why would a firm prefer to pay taxes on the hedged value of a foreign currency cash flow rather than wait to pay the taxes on the realized foreign currency cash flow? Answer: In the presence of a convex tax code and if the forward rate equals the expected future spot rate, a firm would prefer to pay tax on its expected income with certainty rather than paying its expected tax by taking the probability weighted average of the taxes on possible...
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...Your Final Exam is scheduled for next Wednesday. You can take the exam beginning Wednesday Feb 8, 2012 at 12.00 Noon. The Exam window will close on Friday Feb 10, 2012 at 12.00 Noon. You will have two hours, at one sitting, to finish the exam. The current technology does not enable us to monitor the exam, so I will make it "open book". While you have three days to take the exam, I strongly recommend that you take it early on Wednesday or Thursday. In the past, students have encoutered numerous problems if they wait till the last minute such as technology failure, personal or family problems. You will answer a total of 5 questions (2 Problems and 3 short essay Questions). The problems will be focussing on Triangular Arbitrage, and Derivatives. The essay questions will be identical to the ones in the review sheet. More on this in the Adobe session scheduled for Thursday Feb 2, 2012. FINANCE 6644: Global Financial Strategy Krishnan Dandapani January 2012 Final Exam Review Questions Instructions A. Please be concise and precise in your answers. B. Practice answers for closed book, class room setting. C. Suggested length: minimum one page; maximum two pages per question. D. You would answer 5 questions or Problems in two hours in final exam. Questions 1. Ethical Standards a. Can a multinational firm adopt varying ethical standards [such as with regard to product safety...
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...1. What gives rise to the currency exposure at AIFS? American Institute for Foreign Study (AIFS) is a student exchange organization. It organizes exchange programs in education and culture throughout the world with two of its major divisions serving American students traveling abroad in the Study Abroad College division and High School Travel division. AIFS receives their revenues in American Dollars (USD) but incurs their costs and expenses in a foreign currency, mainly in the Euro (EUR) and the British Pound (GBP). AIFS’s currency is exposed to changes in the foreign exchange rate, therefore their gain or loss is determined by the appreciation or depreciation of the American dollar in the foreign market. In order for AIFS to protect its assets they need to hedge their currency in forward contracts and options to reduce currency exposure risks. There are three types of currency risks: the bottom-line risk, the volume risk and competitive pricing risk. AIFS starts to hedge foreign currencies between 6 months and 2 years prior to the main pricing date and the implement forward contracts and currency options (primarily forward contracts) to hedge currency exposure risks. AIFS establishes its pricing in advance and guarantees that price, so if the market changes they will still honor the set price. The Bottom-line Risk Adverse changes in exchange rates against the dollar without hedging could increase costs because AIFS requires large sums of money to cater to their clients...
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...NBER WORKING PAPER SERIES PRICING TO HABITS AND THE LAW OF ONE PRICE Morten Ravn Stephanie Schmitt-Grohe Martin Uribe Working Paper 12731 http://www.nber.org/papers/w12731 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2006 The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2006 by Morten Ravn, Stephanie Schmitt-Grohe, and Martin Uribe. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Pricing to Habits and the Law of One Price Morten Ravn, Stephanie Schmitt-Grohe, and Martin Uribe NBER Working Paper No. 12731 December 2006 JEL No. E3,F4 ABSTRACT This paper proposes a novel international transmission mechanism based on the assumption of deep habits. The term deep habits stands for a preference specification according to which consumers form habits on a good-by-good basis. Under deep habits, firms face more elastic demand functions in markets where nonhabitual demand is high relative to habitual demand, creating an incentive to price discriminate. We refer to this type of price discrimination as pricing to habits. In the presence of pricing to habits, innovations to domestic aggregate demand induce a decline in markups in the domestic country but not abroad, leading to a departure from the law of...
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...Amulya Gattu, Hanny Gomez, Tamta Kavtaradze, Sandra Vargas Amulya Gattu, Hanny Gomez, Tamta Kavtaradze, Sandra Vargas Link Technologies Case Analysis Link Technologies Case Analysis Link Technologies Case Report The derivatives program was reducing risk when the firm was investing in foreign currency futures for the first four months from the implementation date (February 1991 to May 1991). This is seen by the negative correlation of (0.94226594) between the derivative (futures) cash flow and the unhedged cash flow. A purpose of a perfect hedge is to obtain a net of zero or in other words, reduce your risk to nothing not including the cost of the hedge. If a correlation is negative, as it was for the first three months, it means that investing in futures contracts was the right move because the cash flows are moving in opposite directions to minimize the risk. Another way to evaluate the performance of the hedging strategy is to compare the variance of unhedged cash flow and the hedged cash flow, expecting that that variance of the unhedged should be greater than the hedged cash flow. As seen in the table below, the variance of the unhedged is greater than the variance of the hedged when Link Technologies invested in currency futures contracts. Futures Variance | | Unhedged CF | 20,691,861,693.67 | Hedged CF | 2,774,199,924.92 | Difference | 17,917,661,768.75 | Even though, the hedging program was perfectly...
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...Capital Management 4. Financial Forecasting 4.1. Pro Forma Statements and Financial Planning 4.2. Cash Flow Forecasts 4.3. Cash Budgets 4.4. Cost of Capital 4.5. Capital Structure 4.6. Financial Planning 3 COURSE CONTENTS 5. Identification of Financial markets 5.1. Money Market 5.2. Capital Market 5.3. Foreign Exchange Market 5.4. Derivatives Market 6. Management of stocks, bonds, derivatives and other assets 6.1. Potfolio Theory and Asset Pricing 6.2. Common Stock Analysis and Equity Pricing Models 6.3. Fixed Income Analysis and Bond Pricing 6.4. Futures, Options and Other Derivatives 4 COURSE CONTENTS 7. Foreign exchange markets, currency derivative markets and Euromarkets 7.1. Function and structure of foreign exchange markets 7.2. Forecasting foreign exchange rates 7.3. Currency Futures and Options Markets 7.4. Eurodollar Interest Rate Futures Contracts 7.5. International Money Markets 7.6. Fixed Income Analysis and Bond Pricing 7.7. Futures, Options and Other Derivatives 8. Risk analysis and management 8.1. Exchange Rate risk management 8.2. Country risk analysis 5 COURSE CONTENTS 9. Investment decisions in the global marketplace 9.1. Foreign Direct Investment and Cross-Border Acquisitions 9.2. International Capital Structure and Cost of Capital 9.3....
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...of the economic implications and foreign exchange risk of the system of exchange rate for multinational companies with subsidiaries which are located in countries with systems such as managed floating exchange rate, fixed exchange rate linked to a basket of currencies and also a fixed exchange rate backed by a currency board system. Unlike the freely floating exchange rate system which has never been applied under its purest form, monetary authorities is required by the managed floating rate in order to interfere in foreign exchange markets to prevent the currencies from moving too far from an apparent fundamental value. 2. i. Managed Floating Rate More and more...
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...Effect of RMB Exchange Rate on China’s Inflation Contents Chapter 2 Literature review 3 2.1 Introduction 3 2.2 Exchange rate pass-through effect 3 2.2.1 Narrowly defined exchange rate pass-through effect 3 2.2.2 Broadly defined exchange rate pass-through effect 4 2.2.3 Complete and incomplete exchange rate pass-through 5 2.3 Relevant theories of exchange rate pass-through 7 2.3.1 Theory of complete exchange rate pass-through 7 2.3.2 Theory of incomplete pass-through 9 2.4 Empirical research on exchange rate pass-through 13 2.5 Summary and reflection 16 Reference 19 Chapter 2 Literature review 2.1 Introduction This chapter reviews the theoretical and empirical researches on exchange rate pass-through effect. Specifically, this chapter firstly introduces the definition of exchange rate pass-through effect, incomplete and complete exchange rate pass-through. Then, this chapter analyses the theory of exchange rate pass-through effect, with focus on the reasons for the common incomplete exchange rate pass-through effect. After theoretical analysis, this chapter reviews and analyses the empirical research on exchange rate pass-through effect. A major part in this section is the review of the perspective and method for analysing exchange rate pass-through effect. Empirical researches generally referred to McCarthy (2000)’s research method, used VAR model, and selected specific area and time window data to empirically analyse exchange rate pass-through via...
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...Initial Public Offerings Name: FIN 370/Finance for Business Date: Initial Public Offerings Private companies transform into public companies to expand and attract investors. To do this they begin selling common stock to institutional investors who then sell the stock to the general public through a securities exchange. According to Mayo, 2012, “If this sale is the first sale of common stock, it is referred to as an initial public offering (IPO).” In this essay, we will attempt to describe the initial public offering for the global firm, Facebook, Inc. We will describe the role of the investment banker and underwriter, the role of an originating house and a syndicate, explain the pricing of the issue, discuss some of the risks involved in the public offering and how the securities laws deal with them, and discuss any foreign exchange risks the company can face with ideas about how to mitigate them. The first thing Facebook needed to do to launch their IPO was to hire an investment banker and an underwriter. Facebook hired thirty-three investments banks who acted as brokers to bring together individuals with funds to invest in Facebook. The underwriters in those investment banks together with Facebook agreed on a certain amount to raise on the IPO. Their underwriters provided several services, but the main role is basically to take responsibility of selling those shares to investors. If they fail to sell the shares, they still owe the agreed amount to Facebook. The investment...
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