FINANCE 6644: Global Financial Strategy
1. Ethical Standards
a. Can a multinational firm adopt varying ethical standards [such as with regard to product safety (Pinto), employee benefits (Nike) and "kickbacks" to win business (HP)] in its global operations? Why or Why Not? Discuss in depth based on the goals of multinational corporations? (Be sure to identify the merits and demerits/pitfalls for both options).
b. How do corporate governance and financial management differ for US based corporations and global multinational corporations?
(Read: Class notes and discussions)
2. Global Pricing Strategy
With the emergence of the Internet as a dominant influence in global markets, many anticipated that the "Law of One Price" for all products would evolve.
However that did not materialize.
- What is "Law of One Price"?. When would that exist globally?
- Identify the major pricing strategies/ methodologies of corporations in pricing products and services.
- How is "internet pricing" different from 'brick and mortar' pricing? Discuss the impact of the Internet on "Global Pricing Strategies" of firms.
(Class presentation, notes, and presentation by Professor)
3. Triangular Arbitrage Strategy:
A. Is the foreign exchange market inefficient? Discuss.
B. Problem:
The following Quotations are available to you. (You may either buy or sell at the stated rates)
Singapore Bank: Singapore dollar quote for Korean Won Won 714.00/S$
Hong Kong Bank: HK$ quote for Singapore dollars HKmce_markernbsp; 4.70/S$
Korean Bank: Korean won quote for Hong Kong dollars Won 150.00/HK$
Assume you have an initial HK$1,000,000. Is triangular Arbitrage possible? If so, explain the
Steps, and compute your profit?
- What are the implications of trading spreads and commission costs for this profit?
(Read: Class notes, and problem presented in class)
- Financial Institutions Muti-goal Optimization Strategy:
a. Identify the major 'objectives' and 'problems' in the management of financial institutions globally. What strategies do institutions use to meet these challenges?
b. How do regulators evaluate the financial institutions?
c. Why did 'Virtual Banks' fail? Discuss in depth. Based on this, What are the prospects for Mobile Banking worldwide in the forthcoming decade?
d. How do Central Banks promote Monetary Stability? Explain with reference to the recent 'sub-prime' crisis.
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5. Theoretical Relationship 1: Relationship between Money Supply and Inflation; Monetary Equation
- What Causes Inflation? Discuss.
- What is the 'Monetary Equation'. Why is it important to the financial manager?
- What are the implications of this for the 'foreign exchange market'?
- Trade Policy and Offshoring Strategy:
a. Why do nations trade with one another? Explain in your own words.
(Ricardo's theory of Comparative advantage: Economics and Efficiency)
b. What is Dynamic Comparative Advantage? What are the implications of this for the current debate on "Outsourcing" and "Off-shoring?" [Vernon]
c. What strategies should corporations adopt to minimize the impact of off-shoring on its employees?
(Read: Article presented in class, and class hand outs)
- Theoretical Relationship 2 : Relationship between Inflation and Interest Rates; Domestic Fisher Effect
What is the 'Domestic Fisher Effect'?
What is the relationship between Inflation and interest rates ?
Why is it important for the Global Financial manager?
(Read: class notes and hand outs)
- Theoretical Relationship # 3: Relationship between Inflation and Exchange Rates; Purchasing Power Parity
Explain the concept of 'purchasing power parity' (PPP) in your own words.
What are the requisite conditions for PPP to exist?
What is the relationship between PPP and exchange rates ?
(Read: class notes and Instructor Notes on PPP)
- Theoretical Relationship # 4: Relationship between Interest Rates and Exchange Rates; Interest Rate Parity
Illustrate the concept of 'Interst Rate Parity' and 'Covered Interest Arbitrage' with a numerial example. What are the implications of this for Foreign Exchange Market.?
(Read: class notes and Instructor Notes on IRP)
10. Auctions Market Strategy:
Are auctions the optimal method to sell a security or service?
Explain the advantages, and disadvantages of the Auction method of Selling for the buyer and seller, using a specific example..
Explain why corporations do not sell "all" their products by auctions?
What are the reasons for the success of Internet auction companies such as e-bay and Priceline?.
(Read Presentations in class)
11. Global Financial Crisis:
Briefly Explain these crisis in your own words, what these are about, what caused it, how it was resolved and what are the lessons learnt from it.
- Debt Crisis: Russia, Iceland
- Foreign Exchange Crisis: Mexico, Asian Crisis
- Banking Crisis: Japan, USA Subprime
16. Foreign Exchange Hedging using Foreign Currency Derivatives: Problem
Scout Finch is the Chief Financial Officer [CFO] of Dayton Manufacturing, a U.S. based manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a turbine generator to Crown, a British firm for One million pounds. This single sale is quite large in relation to Dayton's present business. Dayton has no other current foreign customers, so the currency risk of this sale is of particular concern. The sale is made in March with payment due three months later in June. Scout Finch has collected the following financial market information for the analysis of her currency exposure problem:
- Spot Exchange rate: $1.7640 per British pound.
- Three month forward rate: $1.7549 per pound (a 2.2676% p. a. discount on the pound)
- Dayton's cost of capital: 12%
- U.K. three month borrowing interest rate: 10.0% (or 2.5% per quarter)
- U.K. three month investment interest rate: 8.0% (or 2% per quarter)
- U.S. three month borrowing interest rate: 8.0% ( or 2.0% per quarter)
- U.S. three month investment interest rate: 6.0% (or 1.5% per quarter)
- June put option in the over-the-counter (bank) market for 1,000,000 British pounds;
Strike price $1.75 (nearly at-the money) 1.5% premium
- June put option in the over-the counter (bank) market for 1,000,000 British pounds:
Strike price $1.71 (out-of-the money) 1.0% premium
- Dayton's foreign exchange advisory service forecasts that the spot rate in there months will be $1.76 per British pound.
Like many manufacturing firms, Dayton operates on relatively narrow margins. Although Ms. Finch and Dayton would be very happy if the pound appreciated versus the dollars, concerns center on the possibility that the pound will fall. When Ms. Finch budgeted this specific contract, she determined that the minimum acceptable margin was at a sale price of $1,700,000. The budget rate, the lowest acceptable dollar per pound exchange rate, was therefore established at $1.70 per British pound. Any exchange rate below would result in Dayton actually losing money on the transaction.
Four alternatives are available to Dayton to manage the exposure:
- Remain un-hedged.
- Hedge in the forward market.
- Hedge in the money market.
- Hedge in the options market. What should Dayton do?
17. Country Risk and Global Capital Budegeting Strategy:
Your corporation has an opportunity to make a major investment in China of $100 million to develop an offshore manufacturing facility. When this plant is fully developed and becomes operational in two years the corporation can close down its current manufacturing facility in the United States and shift operations to China. At present, the expected annual savings in labor and benefit cost is expected to be $20 million. You are asked to develop a proposal to identify the potential risk of this proposal and 'advantages' and 'problems' of this opportunity. Explain how you would proceed.
i. What are the inherent risks in this opportunity?
ii. What economic data would you need for your analysis? Why (How would you use them)?
iii. What potential factors that affect exchange rates between China and US ? How would you protect against that risk?
iv. What other strategies do you recommend before your corporation implements this proposal?
19. Theoretical Relationship 6: Relationship between Spot and Forward Prices
Illustrate the concept of "Spot-Forward pricing parity" relationship with a numerical example. What are the implications of this for Foreign Exchange Market?
20. Bond Market Indexation Strategy
Illustrate the need for, motivation, and concept of Indexation with an example to protect against Inflation in the Global Debt Markets.
21. Global Markets Investment Strategy:
a. Why should investors consider investing overseas?
b. What are the potential advantages and perils?=
c. What is Market Efficiency? What are the implications of Market Efficiency, in a global capital market, for a manager for the pricing of securities and investing corporations' money?
d. Why is psychology important in global setting?
22. Current Hot Topic: European Sovereign Debt Crisis
Currently PIIGS [Portuagal, Ireland, Italy, Greece and Spain] countries have a Soveriegn Debt problem.
- What are the ultimate causes for the current crisis?
- What are the potential implications of this problem for Euro-Currency and European Monetary Integration. What should Europe do to address this problem now and what are the potential perils?
- What are the Implications of this problem for USA?