Read the case study: Do yuan to buy some renminbi? And answer all the questions.
Go beyond the information in case study; analyze and project. Use APA references.
1. Based on your readings, research, and case study, answer, in no less than one page, the following questions:
a. Why is it important for the Chinese yuan to become a major world currency?
b. What needs to take place for the yuan to be listed right along the U.S. dollar and the euro as global currencies?
c. Why is the Chinese government so hesitant to open up the yuan to market forces to determine its value inside and outside China?
Go beyond the information in case study; analyze and project!
Daniels, J., Radebaugh, L., & Sullivan, D. (2013). International business: Environments & operations(14th ed.). Upper Saddle River, NJ: Pearson
2. Second assignment-
A company’s competitive actions should flow from its strategic orientation, and its leadership must build the foundation for a competitive strategy that leads to superior performance. A competitively aggressive company will vigilantly and forcefully defend its market position, while trying to undercut its rivals’ positions (Stambaugh, Yu, & Dubinsky, 2011).
To establish its desired competitive position, the company has to accurately assess its industry and understand the fundamental factors that impact its long-term profitability prospects (Hax & Majluf, 1996). The company should also define its competitive advantage, and how it intends to do business better and differently from the competition. The trade-offs that the company will make, are what will strategically distinguish it from the competition (Collis & Rukstad, 2008).
Based on your readings this week, what are those trade-offs, and how do they impact the company?
Collis, J. D. & Ruckstad, M. G. (2008). Can you say what your strategy is? Harvard Business Review, 86(4), 82-90. Retrieved from www.hbr.org/
Hax, A.C. & Majluf, N.S. (1996). The strategy concept and process (2nd ed.). Upper Saddle River, NJ: Prentice Hall.
Stambaugh, J. E., Yu, A. & Dubinsky, A. J. (2011). Before the attack: A typology of strategies for competitive aggressiveness. Journal of Management Policy and Practice, 12(1), 49 – 63. Retrieved from http://www.na-businesspress.com/jmppopen.html
Translation exposure occurs as MNCs translate their subsidiaries financial data to their home currencies in order to consolidate their financial statements. This type of exposure does not affect the MNCs cash flow, and hence may be regarded as unnecessary to hedge or reduce. However, some MNCs are concerned about their translation exposure due to its impact on their reported earnings, and hence on their valuation and stock prices.
MNCs may minimize their translation exposure by matching their foreign liabilities with their foreign assets e.g. by using foreign financing to match their level of foreign assets. Other companies may use forward contracts or future contracts to hedge their translation exposure. Hedging translation exposure may be limited by inaccurate earnings forecasts, inadequate forward contracts for some currencies, accounting distortions, or increased transaction exposure.
Translation exposure is reduced by selling forward the foreign currency remitted by a subsidiary. If the foreign currency depreciates against the MNC’s home currency, the negative impact on the consolidated income statement will be offset by the gain from the forward sale in that currency. However, if the foreign currency appreciates, this will result in a loss on the forward sale, which will be offset by the favorable effect on the reported consolidated income statement. However, some MNCs are not satisfied with this type of paper gain that offsets a cash loss. In addition, if the subsidiary decides to invest the gains locally, the parent company will not receive any of those gains to account for i.e. the parent company’s net cash flow will net be affected. On the other hand, the loss resulting from hedging is a real loss that will reduce the net cash flow to the parent company. In such a case, the MNC will be reducing its translation exposure at the expense of increasing its transaction exposure.
Some companies prefer not to hedge their translation exposure as they consider it irrelevant. Such companies prefer to clarify on their consolidated statements how their earnings have been affected by exchange rate movements. Knowledgeable investors will understand that the lower earning were due to exchange rate effects, rather than due to poor performance.
Madura, J. (2003). International Financial Management (7thed.). Mason, Ohio: South-Western (Thompson Learning).