Description
The company (________ __________name), a US-based MNC, wants to expand its business in developing world by launching a new product there. It also wants to benefit from lower production costs that developing countries could offer. However, currencies in the developing world are usually more volatile, which could substantially decrease the company’s profit margin. As a team of financial analysts, you have to prepare the country profile based on information from the questions listed below. Choose two to three possible locations for your product and compare them based on their profile. Upon their careful comparison come up with recommendations on the country of your preference.
In this task, your investment currency is naturally USD. The time frame you operate in is five years.
Choose a product and a target location for its realization. The country you choose must be in the developing world.
Analyze the country’s balance of payment deficits/surpluses. What are the weakest points in the BoP over the time (like the CA deficit etc.), and find out what causes them?
What is the political situation and doing business conditions in the country (refer to the news and Doing Business Index)?
Analyze the country’s exchange rate against the USD for the last five years. Try to find the most comprehensive information on exchange rates dynamics, considering both bid and ask prices. Calculate the spread for the indicated period as well as the percentage of annual changes. Once knowing the inflation rate, calculate the real exchange rate.
Find out the interest rates for the last five years and show their dynamics.
What is the inflation rate in the country and how has it been changing?
Upon gathering this initial information test the PPP and IRP theories. Come up with conclusions whether or not arbitrage is possible and what it is most likely to do – depreciate or appreciate your currency against the USD. How much would the company win or lose, if it had some 100,000 of local currency units (LCU) to convert to USD and the IRP held?
Is there any evidence that inflation and nominal interest rates correspond in selected countries?
What is the government’s policy concerning exchange rates? What instruments have they used and how often to influence the exchange rate over the indicated time? As a result, is the country’s exchange rate system fixed, pegged, managed floating or freely floating?
What hedging choice would you prefer (if any) given the current currency situation in the selected country (forwards, futures, call options, put options, conditional options)?
Decide on whether you will rely on the host country market, domestic market or any nearby market to realize your product. In the latter case, which countries could these be and why?
Teams
Please divide yourselves into teams of three people and answer the following questions. The number of participants per group will reflect the number of countries taken for evaluation.
Task
Each team chooses a product andinvestigatestwo to three locations for its launch. Once having selectedthe country of preference, please prepare a report and short presentation on the findings of your research and analysis. The report must consist of highlights of yourresults, statistical data, and the list of literature in the end. Upon successful research, you can fill in the results into the summarized Tables (see Country Profile excel file). As a group, you prepare the report for the country of your preference only, while discussing the disadvantages of other two options in the text. The length of the report should be between 7,000 and 10,000 symbols with spaces (excluding the Annexes and References). In the class, teams will present theirfindings.
A sample structure of the report is as follows:
Executive summary
Main Body
Introduction
Discussion
Financial indicators
Overall Country Risk Profile
Recommendations & Conclusions
Annexes
References
Useful resources
You are free to use any materials from the Internet. Also, consider using the following websites.
1. Exchange rates
https://www.oanda.com/solutions-for-business/historical-rates/main.html
Register there for free will give you a 30-day free trial. Both bid and ask rates included.
2. Interest rates (take deposit rates)
http://data.worldbank.org/indicator/FR.INR.RISK
3. Inflation (consumer prices)
http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG
4. Ch. 5, Madura book (types of hedging instruments).
5. Ch. 16, Madura book (country risk analysis, Checklist Approach, pp. 487 onwards)
6. Doing business index
http://www.doingbusiness.org/rankings
http://www.doingbusiness.org/data/distance-to-frontier
7. Corruption Index
https://www.transparency.org/country/
8. CIA World Factbook
https://www.cia.gov/library/publications/the-world-factbook/
