Chapter 1, Problem 4QA

What are the risks faced by IKEA after they decided to go for global market?

The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$):   Spot Exchange Rate One-Year Forward Exchange Rate Canadian dollar (U.S. dollar/Canadian dollar) 0.8932 0.9133   The current one-year interest rate on U.S. Treasury securities is 8.03%. If interest rate parity holds, what is the expected yield on one-year Canadian…

1. Multinational corporations Why do companies go global? Multinational corporations operate in locations across the world. Each company has its own motive for its presence in different countries. Consider the following case: Saltwater Logistics Corp.'s domestic demand has matured and leveled off. Consequently, the firm is looking to expand its operations overseas because it believes that its growth opportunities are more promising in foreign markets. Which of the following best describes the reason Saltwater Logistics Corp. has decided to go global? To seek production efficiency To avoid political, trade, and regulatory hurdles To broaden its markets Now consider the case of Blue Box Crate Company. Many of Blue Box Crate Company's customers have expanded to India. Consequently, Blue Box Crate Company has decided to expand its operations to India to better serve its customers. Blue Box Crate Company has decided to go global in order to

The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following:   Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$):   Spot Exchange Rate One-Year Forward Exchange Rate Canadian dollar (U.S. dollar/Canadian dollar) 0.8798 0.8935   The current one-year interest rate on U.S. Treasury securities is 8.03%. If interest rate parity holds, what is the expected yield on one-year Canadian…

The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$) Spot Exchange Rate 0.8876 One-Year Forward Exchange Rate 0.9023 Canadian dollar (U.S. dollar/Canadian dollar) The current one-year interest rate on U.S. Treasury securities is 8.03%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk? O 6.27% O…

Increased global interaction has been promoted by advanced technology in communication, ideas and culture, which largely encourages and facilitates international trading. Businesses go abroad in seeking better financial incentives, stronger networks, and markets of opportunities. But at the same time, the complexities in terms or risks involved in international operation are more than domestic firms. How to manage cultural risks and other factors related to a foreign operation of a multinational business. Is cultural, business, or political risk more challenging to overcome than one of the others? Why or why not? How should American standards influence multinational businesses?

The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk.   Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply. If a government intends to prevent its currency’s value from falling relative to other currencies, it will purchase its currency from sellers in the market. If the demand for a currency increases, the currency’s value will increase relative to other currencies. When a government limits imports and restricts foreign exchange transactions, its currency’s value tends…

Which of the following does NOT refer to the ways of how a multinational company can reduce political risk?  Taking a conservative approach to investment and adjusting NPV of the project by reducing expected cash flows or by increasing the cost of capital in accordance with existing trends. Purchasing insurance policy against political risks. Acquiring minor shares in foreign corporations. Creating a joint venture with local partners or a consortium with other multinational companies.

4. Interest rate parity The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well-for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: An American investor is considering investing $1,000 in default-free 90-day Japanese bonds that promise a 4% annual nominal return. • The spot exchange rate is ¥101.12 per dollar. • The 90-day forward exchange rate is 100.25 per dollar. The investor's annualized return on these bonds-if he or she can lock in the dollar return by selling the foreign currency in the forward market-will be…