Overview
The final project for this course is the creation of a Foreign Exchange Rate Risk Management in Multinational Enterprise in Business Strategy. You will examine how a multinational enterprise (MNE) uses foreign exchange risk management in its business strategy.
The final project for this course consists of two major components. The first component is a Case Study Briefing document that focuses on a case study of foreign exchange risk management techniques currently used in a multinational enterprise (MNE). You will complete a briefing document in Module Five that focuses on the risk management techniques currently used in the MNE that you have chosen. Within this document, you will address the background and nature of the company's business, the exposure to foreign exchange rate the company faces (i.e., through its accounts payable because it imports, through its accounts receivable because it exports, or through both accounts), and the tools or techniques the company currently uses to mitigate those risks (i.e., the company uses foreign debt to hedge the currency exposure, using derivatives such as currency swaps, futures, forwards, or options, for only a certain number of months to hedge only a certain percentage of the exposure, etc.).
The second component is a Subsidiary Expansion or an Investment document that focuses on your research to expand this MNE into a new country. The country could be the country in which the MNE is currently located. Or, it could be any country that you are interested in expanding into. Within this document, you will address the capital structure of the new subsidiary and, if the company has debt financing, from where or which currency you would get the debt financing, and why. Once the company breaks even and starts making a profit, how would you manage the profit (i.e., need to invest for expansion for growth or because of restrictions on blocked funds, repatriate back to the mother company annually because you are not certain of the country and currency risk, etc.)?
The project is divided into two milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones will be submitted in Modules One and Five. The final submission will be in Module Nine.
In this assignment, you will demonstrate your mastery of the following course outcomes:
- Analyze the fundamentals of foreign exchange risk management in mitigating corporate risk
- Interpret exchange rate movements when assessing the foreign exchange risk on the corporation by examining the institutional structure and mechanisms of foreign exchange markets
- Evaluate the financial and strategic impact of foreign exchange risk on the corporation for shaping future risk management and funding strategies
- Analyze how the dynamics of global capital markets shape the foreign exchange market for determining funding strategies and mitigating corporate risk
- Propose appropriate international capital budgeting strategies for managing multinational corporations' international monetary relationships
Prompt
Multinational corporations (MNEs) operate globally with several established subsidiaries in foreign countries. In this project, you will choose a MNE. You will then download the company's annual report and analytically research the company to understand its current foreign exchange rate exposure, and the tools or techniques the company uses to mitigate the risks. Moreover, you will choose a country in which you will expand your presence and create a new subsidiary. You will need to identify your capital structure for your new subsidiary, as well as plan for your profit repatriation.
Resources to consider:
- Corporate Income Tax Rates Around the World, 2014
- KPMG: Corporate Tax Rates Table
- Country and Lending Groups
- World Trade Organization: Statistics Database
- U.S. Free Trade Agreements
- How Much Do U.S. Multinational Corporations Pay in Foreign Income Taxes?
- Global Financial Development
- International Debt Statistics
Specifically, the following critical elements must be addressed:
I. Company Proposal and Background: Provide a brief historical background on the firm you have selected, including the nature of its products or services.
II. Foreign Exchange Risk Management Analysis: Analyze the firm's transactions, its foreign exchange rate risk exposure, and the tools the firm currently uses to mitigate the risk.
a) Explain the firm's specific transactions, which are the accounts payable and accounts receivable, and how these transactions expose the firm to foreign exchange rate risk. Some firms could be exposed to both of the accounts because they import raw materials from foreign countries, add value to the product, and then re-export the product to other foreign countries. However, the net exposure must be only one account.
b) Identify the tools the firm currently uses in mitigating the foreign exchange rate risk. Occasionally, firms utilize more than one tool to hedge the risk. Some examples of tools are using foreign debt to hedge the foreign income, or using derivatives such as currency swaps, futures, forwards, or options.
c) However, most of the time, the company does not fully hedge its exposure to the foreign currency. You must explain the percentage hedge of its exposure as well as the hedging time length. Then, you must provide the potential risk to which the company could still be exposed from the foreign exchange rate.
III. Investments/Subsidiary Expansion: Choose a country to enter to create a new subsidiary. Determine the capital structure of your new subsidiary, including the source of funding.
a) Provide an explanation of the country in which you chose to create a new subsidiary. It is possible that the country you selected already has a subsidiary of your MNE, which is fine.
b) Explain what the capital structure for this new subsidiary should look like. Should it be the same as the mother company's? Why? If your subsidiary should have debt, determine the source of the debt and explain your rationale for choosing the source.
IV. Repatriations of Funds: Once your subsidiary turns a profit, evaluate how you will repatriate your profit. You will need to look into the country in which the subsidiary is located and determine if it has any restrictions on blocked funds. If so, you must incorporate the findings into your final decision. Explain if you will repatriate your profit back annually on all, or only partially, and why.