Finance 490 – EV’s Brazil
Please make a PowerPoint presentation by following the template and questions below. Please answer the questions in the order of the parts below. There is a total of 10 parts. please create 2 slides per part. Additionally, try to add photos to the PowerPoint.
The product we will be using is Electric Vehicles in the country Brazil.
Part #1: Developing Your Idea – ELECTRIC VEHICLES IN BRAZIL
you should assume that you will receive the foreign currency when selling your product.
The following questions will help you define your MNC idea (and should be included in your presentation): (MNC IDEA – EV’S IN BRAZIL)
1. What is the product that you plan to sell? (ELECTRIC VEHICLES)
2. What foreign country do you plan to target? (BRAZIL)
3. How will you sell the product in that country (i.e., through a distributor? by mail?)?
4. Is there some evidence that consumers in that country would buy this type of product?
5. Do you need to purchase supplies or hire labor?
6. Will any expenses you incur from producing the product be in U.S. dollars or some other currency?
Part #2: Assessing Country Factors that will Affect Demand for Your Product
1. Identify the factors that can affect the balance of trade between the United States and the country that you targeted for your business. Explain how each of these factors may affect the demand for your product.
2. Which of these factors is likely to be most important in affecting the demand for your product?
3. Determine whether the product you plan to sell is already one of the main imports for that country.
4. Review the import controls set by that countrys government. Determine whether your business would be affected by trade regulations.
Part #3: Using the Foreign Exchange Market
1. Explain how you will use the spot market for your business.
2. What bank do you plan to use to exchange this foreign currency received for USD? What is the bid/ask spread on a recent quotation by that bank? Look online or call the bank to obtain quotations.
3. Will you possibly need the forward market? Explain.
4. Go to www.oanda.com. Click on Currency Tools, scroll down to Historical Currency Converters, and then click on Currency Trends. Explain how the main foreign currency for your business has changed over the last month, the last three months, and the last year. Include the chart(s) in your presentation.
Part #4: Monitoring Movements in the Foreign Currencys Value and Hedging
1. What key factors likely affect the value of the foreign currency for your product and country over time?
2. How can you hedge the foreign currency exchange rate risk (futures, forwards, options, etc.)?
3. Go to www.cmegroup.com. Determine the prevailing futures prices of the main currency for your business. Go to www.oanda.com and determine the prevailing spot rate. What is the prevailing discount (if the spot price < futures price) or premium (if the spot price > futures price) of the futures price? Graph and include in your presentation.
4. Would you hedge any transactions for your business based on the futures price relative to the spot rate?
Part #5: Monitoring Central Bank Intervention
1. How can your business be affected if the Fed attempts to strengthen the U.S. dollar in the foreign exchange market?
2. If the Fed decides to weaken the USD, how will your business be affected?
3. How can direct or indirect central bank intervention affect your business even if there is no impact on exchange rates?
4. Go to www.bis.org/cbanks.htm to access the link for the central bank in your target country. Determine whether this central bank intervenes to control its currency in the foreign exchange market.
Part #6: Assessing Spot and Forward Rates
1. Obtain a quotation for the spot rate of the foreign currency (that you will receive from your business sales) from the bank where you intend to conduct your foreign exchange transactions. Then, obtain a quotation for the spot rate of the foreign currency from another bank. Does it appear that the spot rates are aligned across locations at a given point in time?
2. Obtain a quotation for the one-year forward rate of the foreign currency from the bank where you intend to conduct your foreign exchange transactions. Then, use a business periodical or internet to determine the prevailing one-year interest rate in the United States and the foreign country of concern (to which you are selling your product). Does it appear that interest rate parity (IRP) holds?
3. Review the data on forward rates from the Wall Street Journal or another source to determine whether the foreign currency of concern typically exhibits a discount or premium. Then review data on interest rates to compare the foreign country of concern and the U.S. interest rates. Does it appear that the forward rate of the foreign currency exhibits a premium (discount) when its interest rate is lower (higher) than the U.S. interest rate, a suggested by interest rate parity (IRP)?
Part #7: Determining Whether IFE Holds
1. Use the Wall Street Journal or another data source to record the interest rate differential between the interest rate of the foreign country in which you plan to do business and the U.S. rate over the last ~five quarters.
2. Then, review the exchange rate percentage change in the foreign currency of concern over each of those corresponding quarters to determine whether the International Fisher Effect (IFE) appears to hold over those quarters for that currency.
Part #8: Monitoring Exchange Rate Trends
1. Use a business periodical or the internet to determine how the value of the foreign currency of concern has changed in each of the last five weeks.
2. Does it appear that there is a trend over the last five weeks?
3. What is the percentage change over these weeks?
4. If you believed that the currencys value would continue following the recent trend, would it appreciate or depreciate in the near future (vs. the USD)?
Part #9: Recognizing Exposure to Exchange Rate Risk
Recall that when you created your business idea, it was assumed that your receivables would be denominated in the foreign currency of concern upon the sale of your products.
1. Describe your exposure to exchange rate risk. In other words, describe the exchange rate conditions affecting the performance of your business.
2. Is your business subject to transaction exposure? Explain why or why not.
3. Is your business subject to economic exposure? Explain why or why not.
4. Is your business subject to translation exposure? Explain why or why not.
Part #10: Redenominating Receivables in U.S. Dollars
Recall that when you created your business idea, it was assumed that your receivables would be denominated in the foreign currency of concern upon the sale of your products. For this part only, assume that you could switch your pricing policy so that receivables would be denominated in USD instead of the foreign currency.
1. How would this switch affect the transaction exposure and economic exposure of your business?
2. Explain the conditions that could still cause the performance of your business to be affected by exchange rate movements.