Finance Minicase Essay

MINI CASEFor your job as the business reporter for a local newspaper, you ar asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press get out to itage has been assumption to losses in the orthogonal exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm.Your editor would like you to encompass several specific questions dealing with multinational finance. Prep are a response to the following memorandum from your editorTo Business ReporterFrom Perry White, Editor, Daily PlanetRe Upcoming Series on Multinational FinanceIn your upcoming series on multinational finance, I would like to make sure you cover several specific points. Before you begin this assignment, I want to make sure we are all reading from the same script because accuracy has perpetually been the cornerstone of the Daily Planet. Id like a response to the following que stions before we proceeda. What new problems and factors are encountered in international, as contrary to domestic, financial management?When getting into international finance some problems and factors are added to the ones experienced within domestic finance. These problems come from exchange browse, cross b point barriers and backing opportunities in the global market but they do not get rid of the typical Business and fiscal Risks. Business Risks can be identify as the ones that come out with competition from other companies, reduction in sales or any other factor that may affect the activities of the MNC, and Financial Risk is related with the firms financial structure.The international trade and investment of a MNC requires the handling of foreign currencies which is sometimes translated as an Exchange post risk due to the volatility of the exchange rate. Added to this exchange risk, Multinational Companies deals with Political Risks due to the changing political systems o f different nations among their legal resolutions, taxation procedures of movements in policies.b. What does the marches arbitrage profit mean?Arbitrage profit means riskless profit, this is mathematical thanks to arbitrageurs who are individuals involved in the process of buying and marketing in more than one country to achieve this riskless profit.c. What can a firm do to reduce exchange risk?In order for a firm to reduce its exchange risk some firms use forward-market and money-market hedges, nonetheless when these tools are not available MNC apply leading and lagging strategies which are practiced to defer income and thereby delay paying taxes and to create unhedged positions in order to speculate cash managers may delay paying out currencies they deport to appreciate and accelerate paying out currencies they expect to depreciate.d. What are the differences among a forward contract, a futures contract, and options? Forward contracts are agreements between two parties where t he buyer agrees to leveraging an asset (the foreign currency) and the seller agrees to sell the asset at a specific date at a price agreed upon now. Futures contracts are akin but are standardized and traded on an organized exchange. Options offer the buyer the right, but not the obligation, to buy or sell an underlying asset (the foreign currency) at a fixed price up to or on a specific date.Use the following data in your responses to the remaining questions selling Quotes for Foreign Currencies in New YorkCOUNTRY-CURRENCY CONTRACT S/FOREIGN Canada-dollar Spot .8450 30-day .8415 90-day .8390 Japan- fade Spot .004700 30-day .004750 90-day .004820 Switzerland-franc Spot .5150 30-day .5182 90-day .5328 e. An American business needs to pay (a) 15,000 Canadian dollars, (b) 1.5 meg yen, and (c) 55,000 Swiss francs to businesses abroad. What are the dollar payments to the respective countries?We will use spot rates for calculations since time of payment is not specifie d.Canadian-dollar 15,000 = $12,675 USD = 15000 x0.845Japan-yen 1,500,000 = $7,050 USD = 1500000 x0.0047Swiss francs 55,000 = $28,325 USD = 55000 x0.515f. An American business pays $20,000, $5,000, and $15,000 to suppliers in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive?Japan = $20,000/0.0047 = $4,255,319 YenSwitzerland= $5,000/0.515 = $9,709 Swiss francsCanada= $15,000 /0.845 = $17,751 Canadian dollarsg. Compute the validating quote for the spot and forward Canadian dollar contract.The indirect quote indicates the number of units of a foreign currency that can be bought for one unit of the position currency.Indirect quote = foreign currency / home currencyContract S/ foreign Spot .8450 30 days .8415 90 days .8390 Indirect quote pic $ Spot pic = 1.1834 Forward 30 days pic = 1.1883 90 days pic= 1.1918 h. You own $10,000. The dollar rate in capital of Japan is 216.6752. The yen rate in New York is given in the preced ing table. are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars?Data $10,000 dollars Dollar rate in Tokyo is $216.6752 yen per dollar Yen rate in New York according to table 1 yen /0.004700 dollar Actual Yen rate in Tokyo 1 yen/ 0.004615 dollarArbitrage profits will be possible because the indirect rates are out of line (they are different). This is possible assuming no transaction cost.$10,000 dollars X 216.6752 = 2,166,752Arbitrage scheme heart and soul of money in yens = $2,166,752 Table rate Actual Rate 0.004700 0.004615 Amount dollars= $10,183.7344 Amount dollars= $10,000 Difference= $183.7344 Difference= $0.00 (2,166,752 yen ) X (0.004700) = $10,183.7344 dollars(2,166,752 yen) X (0.004615) = $10,000.00 dollarsProfit gain= $10,183.7344 dollars $10,000.00 dollars= 183.7344 Profit gain= $ 183.7344 dollarsi. Compute the Canadian dollar/yen spot rate from the data in the preceding table.Canadian Dollar/ U.S. Dollar Rate 1 / .8450 = 1.1834Yen/ U.S. Dollar Rate 1 / .004700= 179.78As we can see 1.1834 Canadian Dollar is equal to 1 American Dollar meanwhile 212.76 Yen is the same that 1 American Dollar, it means that for each 212.76 Yen you bring on 1 American Dollar.