Before starting the case, make sure to go through the required reading material carefully. Review the concepts of exchange rates, currency hedging, and other methods of dealing with exchange rate risk. The topic of this module is difficult, so make sure you go carefully through all of the required tutorials and book chapters.
When you have finished reviewing the background materials, apply your knowledge of the material to answer the following questions in a 4- to 5-page paper:
- Suppose you are a consultant who travels the world to make predictions about exchange rates for your clients. You have been hired to go to a foreign country to make a prediction about whether the value of the currency in this country will go up or down. When you arrive in this country, the first thing you notice is that everything is very expensive compared to what you are used to in the United States. Some items such as soft drinks or bottled water cost twice as much as what you pay at home. You also find that the economy in this country is starting to shrink a bit, and several foreign-owned businesses are moving out of the country. Would you tell your client that you expect the value of the currency in this country will increase or decrease? Explain your reasoning, and make references to Agarwal (2009) in your answer.
- Suppose a small manufacturing business purchases 90% of its raw materials and supplies from Japan. It is a very specialized business and has no place other than Japan to purchase its materials. Thus, if the value of the Japanese currency goes up compared to the dollar, profit margins will go down since it will cost the company more to purchase its supplies. What methods do you think would be best to manage this risk under these circumstances? Refer to at least one of the required readings from the background materials in your answer.
- Consider a large multinational consumer product company with operations in all major advanced and emerging economies. Now suppose the value of the Indian and Brazilian currencies drops dramatically and the value of the Mexican peso increases dramatically. What kind of strategic changes in marketing and/or location of production facilities do you think this company should take given these new exchange rates? Explain your reasoning, and make references to Avadhani (2010) and Shackman (2015) in your answer.
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