Acceleration or delay of payments is more useful to an IC than to smaller, separate companies, because an IC has more flexibility to finalize the transaction. An IC can benefit the enterprise as a whole by cooperating in payment leads or lags. The IC objective is to remove its money from weak currencies and place it into strong currencies as quickly as reasonably possible.
This allows the IC units to make payment immediately instead of incurring the hedging costs incurred by independent companies while waiting the future day of payment. If the profit of the unit paying immediately suffers from loss of interest on the money or shortage of operating capital, adjustment can be made to recognize that the IC gained as a result of the cooperation of that management’s IC unit.
I think we're in the same class and my responses are due this week... So whatever you do, please do not post the exact responses--rewrite your answers--PLEASE!!!
1. Why is an exporter that is to be paid in six months in a foreign currency worried about fluctuating foreign exchange rates?
• Because there is the possibility that the foreign currency will inflate (diminish in value) over the six month period which could result in a lower payment in local currency.
2. Are there ways in which this exporter can protect itself? If so, what are they?
• Yes, the exporter can use hedge fund techniques to leverage current currency trading values. For example: a forward hedge would allow the exporter to sell forward contracts as protection from a future fall in prices, and a short hedge would allow the exporter to sell an interest rate contract for future delivery as protection against increases in short-term rates.
3. How does the credit or money market hedge work?
• Companies can get a loan in foreign currency in the amount of a specific transaction and then convert it to local currency. When the transaction is complete the loan will be paid in full.
4. Why is acceleration or delay of payments more useful to an IC than to smaller, separate companies?
• The effort is to get the money out of the weak currencies and into the stronger currency as quickly as possible
5. How would you accomplish exposure netting with currencies to two countries that tend to go up and down together in value?
• A long position could be taken in the one currency with a short position in the other.
6. Why is the price adjustment device more useful to an IC than to smaller, separate companies?
• Price adjustment is a device that can be used on intraenterprise transactions to anticipate fluctuations in currency exchange rates. This is not something that a single entity company could leverage.
7. Some argue that translation gains or losses are not important so long as they have not been realized and are only accounting entries. What is the other side of that argument?
• Currency valuations are still an important aspect of doing business, and if the translation shows a lower value than at that moment the company is at a lower value.
8. Is the parallel loan a sort of swap? How does it work?
• A parallel loan is a form of swap. A loan is taken out in one currency by the originating parent company and made to foreign subsidiary of the other company. The other company does the exact same thing in the same currency. Each loan is made and repaid in one currency avoiding foreign exchange expense.
9. How and why would a seller make a sale to a buyer that has no money the seller can use?
• The seller can use other means to recap the money. Countertrade can be used to provide back a means of paying for the original goods.
10. Developed country partners in countertrade contracts have had problems with quality and timely delivery of goods from the developing country partners. How are they trying to deal with those problems?
• The first is by having a third party inspect the goods to make sure that they are manufactured up to specifications as well as being shipped properly and as agreed. The other option is to have a local bank guarantee both delivery and quality. The bank then serves as a local third party and ensures that the product meets specifications.
Ball, D. A., McCulloch, W. H. Jr., Frantz, P. L., Geringer, & J. M., Minor, M. S. (2006). International business: The challenge of global competition (10th ed.). New York: McGraw-Hill.
1. Some argue that translation gains or losses are not important so long as they have not been realized and are only accounting entries. What is the other side of that argument?
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Is the parallel loan a sort of swap? How does it work?
Yes - do rewrite - too many students are cheating.