Andrea Holmes

Week 1
1/7/2020

Chapter 1: Questions 11, 18, and Small Business Dilemma (SBD)

Chapter 2: Question 11 and SBD
Chapter 3: Questions 6, 7, 18, and SBD

Chapter 1
Question 11 Exchange rate risk relates to the possibilty of
an investment losing its value due to changes
in currency. McCanna Corp. is exposed to
exchange rate risks if the foreign currency
value is reduced or becomes weak compared
to the local currency since they are associated
to a French sub. Once rates decrease so does
cash flow.

Question 18 Financial managers of the firm failed to

consider the firm's decision to halt expansion
within new markets. Since the firm decided
not to expand or penetrate new markets the
valuation should be reduced for the following
year. Deciding not to expand into foreign
market could have a negative effect on
investments. In this case, financial managers
will likely overestimate its market share as
competition is expected to increase within the
EURO.

Small Business Dilemma

1 Jim has decided to implement his strategy of
selling footballs globally, so this expansion
would mean he has developed a multinational
corp.

2 Agency costs are lower for for Sports Exports

Company because there are no conflicting
parties since the owner alone manages the
company. This implies that where there is a
higher percentage of managerial ownership,
agency costs are lower.
 3 Sports Exports Company does have a
comparative advantage over its potential
customers. Because Jim is producing his goods
in the US where there are better resources
due to football being an American sport and
distributing goods in a foreign market that has
no desire to produce this good. There
advantages like being a first mover, and the
ability to build a trustworthy customer base.

4 Various factors that should be considered

prior to entering foreign markets are supply
and demand of the commodity, volatility of
the currency in that market, consumer habits,
and demographics. As Jim is the sole
proprietor, there maybe business strategy
issues with producing enough goods to sell to
distributors.

5 Sports Exports Company should perform

SWOT, competitive, and market strategy
analyses. In addition to the analyses
completion, the business could offer
franchising opportunities, become a joint
venture, or merger/acquisiton type deal. Joint
venture and merging requires heavy cash
flow, so the firm should consider licensing its
product or flood the market by international
trading.

Chapter 2
Question 11 This implies that if no explicit trade barries
exist,; then, the local governemnt would try
and manipulate exchange rates to reduce
foreign competition. As an example of what
this statement implies, a U.S. firm may be
discouraged from exporting goods to China if
the value against the yuan is influnced at a
higher rate. Thus, the cost of the good would
be considered too expensive for Chinese
consumers. The opposite could also occur
where the USD becomes substantially weaker
than the yuan.

Small Busines Dilemma

 Several factors that may affect the current
account balance between the US and the UK
are higher inflation, high national income,
exchange rate between pound and usd, and
governmental restrictions.

• A shift in demand for US products could be

caused by higher inflation in the UK; however,
since there is no local “football” retailer this
industry would not be deeply affected by
inflation risen demand in the US based
product.
• Since income maybe higher in the UK, local
consumers may spend more and the greater
spend, the greater demand for goods and
services. If there is a lower national income,
then demand would have a negative effect.
• Chances are that the value of the pound
may change over time; affecting the exchange
rate between pounds and usd. Yet, Sports
Exports Company has agreed the accept
british pounds as a currency of payment from
distributors, exchange rates inconsistencies
will not affect the demand of footballs.
• The British government could impose
restrictions on exported goods affecting the
business operations. With high hopes, it is
doubted that the brand’s products will be
affected.

Chapter 3
Question 6 2%
Question 7 9.1%
Question 18 Cross Exchange rate 6 Pesos/Canadian dollar
Number of pesos to be bought in exchange for 1200
It is best to accept the offer and exchange
with the tourist. You will receive 1300 pesos
for 200 Canadian dollars.
Small Business Dilemma
1 The business would retain an account with a
commercial bank that offers the ability to
maintain payments for goods paid in foreign
exchange. As goods are sold and payments
are received, the bank would convert the
british pound into USD at the spot rate.
2 Over time the pound will be exposed to
market changes causing the value to decrease
or substantially increase. Thus, causes the
business to be exposed to exchange rate risk.
As depreciation occurs, payments made in
pounds will amount to a lesser value in the
converting currency. To take advantage of the
forward market to hedge risks, Sports Exports
Company would engage in forward contracts.
To engage in forward contracts, the busines
should sell pounds forward of exchange in
USD. Forwards eliminate risks of potential
losses from adverse market changes. The
downside to this is that potential profits could
be reduced. For an example, Sports Exports
Company can sell pounds at an amount equal
to the maturity value of the forwarding
contract and buy USD at the one year forward
rate.