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globalization and multinational corporations
multinational corporations and their benefit to globalization
purchasing power parity theory notes
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Globalization has led to an increase in multinational companies that produce different types of goods. Although these multinational corporations have been reaping substantial benefits as a result of market expansion, they face a greater risk of losing their international revenues as a result of fluctuations in exchange rates. Changes in the exchange rate between the countries expose the home company to various risks such as transaction exposure, translation, and economic exposure. As a result, the value of the firm is affected by fluctuation in the exchange rate. To effectively manage the exposures, companies use various hedging strategies such as the use of forwards contracts. The forward contracts enable the company to specify the fixed exchange which it will be willing to buy the foreign currency. This practice allows the organization to reduce the element of uncertainty regarding future cash flows. In this analysis, we are going to analyze Jaguar plc, which operates in the United Kingdom but sales over 50% of its products in the United States. As a result, in this analysis, we are going to take the case study of Jaguar plc and analyze various aspects. We are going to discuss on different exposures Jaguar is facing, the value of the company, the effect of dollar depreciation on the value of the corporate, and ways to …show more content…
One of them is the discounted cash flow model and the other being the present value model. The discounted cash flow is used to determine the value of the firm in the future, while the present value model is used to give the current value of the company using future cash flows. Apart from valuation models, we also have exchange determination techniques such as purchasing power parity (PPP). This theory is used to determine the value of one currency to another by comparing the price of a particular commodity in one country to another. (Gans, King, Stonecash, Libich, & Mankiw,
Saputo’s business is constantly affected by changes in the exchange rate as the majority of its business takes place outside of Canada. Due to the fact products and cash flows travel internationally, the company is exposed to economic exposures. Exchange exposure affects Saputo in many ways such as the cost of production and demand for their products. Transaction exposure affects Saputo when cash flows from foreign operations into Canada. Saputo is affected by translation exposure when foreign revenue is converted into Canadian dollars for its financial statements.
In this memorandum, I compare two options Foxy Originals have to enter the U.S market. Specifically, CVP analysis is used to measure the financial implications of each alternative. I also make recommendations and action plan at the end of this document.
DCF model could be the basic valuation, other valuing method, like Market Multiples should be considered to make result more accurate.
This case explores the operating exposure of Jaguar PLC in 1984, just as the government is about to relinquish control and take the company public via an IPO. The primary concern of the CFO is that Jaguar sells over 50% of its cars in the US, while its production costs and factories are U.K.-based. This currency mismatch creates operating exposure for the firm that needs to be hedged.
see, foreign exchange hedging was an area of key importance for AIFS given the level of currency
A key measurement of success for JLR was Tata Motors approach to the merger, acquisition and integration process. TATA employed directly opposite methods to Ford. The essence of this method lay in respecting the existing British culture of the brands rather than imposing a foreign culture. Thus this was financially positive for the company as the following graph illustrates the impact such an approach has brought about on JLR success over the years (Kwintessential, 2013).
Perhaps the single most well known concept in foreign exchange theory is that of Purchasing Power Parity (PPP). The basic idea of PPP is that currencies represent purchasing power over goods and services. Either the exchange rate or price levels adjust to keep purchasing power constant. For example, say a particular basket of goods sells for $2000 in America and 1000 GBP in Great Britain. According to PPP, the exchange rate of dollars to pounds should be 2:1. If it were not 2:1; if, for example only 1.5 dollars was needed to purchase 1 pound, an arbitrageur would buy the basket of goods for 1000 pounds ($1500) and resell them in America for $2000. He would continue to do this until currency traders realized that they were being underpaid for their pounds and started to charge two dollars each for them, or Americans realized that they were paying too much for these goods and became willing to pay only $1500 for them, or some combination of the two.
When considering the currency exposure that would need to be managed by Roraima, three aspects must be considered. Transaction exposure, translation exposure and economic exposure. Transaction exposure would be when dealings would be “affected by fluctuations in foreign exchange rate values” (306). Translation exposure would occur when these exchange rate differences show up differently on the financial statements. And lastly, the economic exposure refers to a situation in which the projected “earning power is affected by changes in exchange rates” (307). Economic exposure is the concept that best reflects the overall process of managing foreign exchange risk because it deals with the long-term effects of a global strategy and earning power. The firm would have to be alert to changes in exchange rates enabling them to project their costs and
Next plc sells products for men, women and children. There are about 700 Next stores: most of them (more than 500) are located in the UK and Ireland and around 200 stores are situated in Europe, Asia and even in the Middle East. It also has an online store and many international franchises . Next is considered to be the largest clothing retail company in the UK (according to the sales numbers provided by Bloomberg and Telegraph ). Moreover, the company has been listed on the LSE (London Stock Exchange) and on the FTSE (Financial Times Stock Exchange) 100 Index .
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
Chery Jaguar Land Rover Automotive Company Ltd. is a 50:50 independent joint venture between the Chinese auto manufacturer Chery Automotive and the giant UK auto manufacturer Jaguar Land Rover. The scope of the joint venture is to manufacture locally built products by Jaguar Land Rover range and also the development and delivery of new and existing joint venture branded vehicles.
Jaguar Land Rover (JLR) were two separate automotive companies until 2002 when Ford merged the two British premium brands, creating a single business entity. Previous business history of the brand has been unstable similar to other conventional vehicle manufacturers in the UK (Marketline, 2013). In 2008, Tata Motors, India’s largest automobile company acquired Jaguar and Land Rover from Ford for $2.3 billion (Johnson, Whittington and Scholes, 2011). Land Rover is considered the world’s leading manufacturer of premium all-wheel drive vehicles whilst Jaguar specialises in premium sports saloon and sports car marques (Jaguar Land Rover, 2014a).
One type of exchange risk faced by multinational companies is transaction risk. If a company sells products to an overseas customer it might be subject to transaction risk. If a UK company is expecting a payment from a US customer in June and the invoice was made in January, the exchange rate is bound to have changed during the period. If the deal was worth £1,000,000 and the american dollar compared to pound sterling weakened from US$1.40 in January to US$1.50 in June, the UK company would loose £47,619 (Appendix A).
1. What is the business reason for China Noah’s potential currency exposure? Does the company need to subject itself to substantial exchange rate risk? Is the risk “material” to China Noah? Do you think China Noah should hedge?
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...