None of our client companies operate in a foreign country. They don’t
sell into a foreign market. Nor do they manufacture in a foreign market.
So we will use a hypothetical manufacturing company, Daewoo, for the
assignment.
Daewoo is an American automobile manufacturing company that makes
cars in the U.S. and sells in the U.K. market. Assume that a majority of
its revenue comes from the U.K. market. Read the attached article, and
answer the following questions.
- Monetary Policy: Did the Bank of England increase or decrease
interest rates? What is the purpose of the policy move, and what is its
risk? How would it impact Daewoo’s profits? What should the company do?
The Bank of England increased interest rates to try and keep high
inflation from becoming embedded in the nation’s economy according to
the text. Britain is currently seeing government change, and a new
monarch, which also plays a reason into why the consumer prices rose
close to 10% from a year prior. This would mean that Daewoo, since the
prices in the UK are going higher, that the company would make more less
money. This is due rise in inflation, which means less people are buying
bigger better things, because they don’t have the money for it.
- Foreign Exchange Risk: Is the British Pound increasing or decreasing
in value against the U.S. Dollar? What would that mean for Daewoo’s
profits? What should the company do? The pound is decreasing, and was
recorded at trading around $1.12, this means that the US Dollar is worth
more than the UK currency trade value of the pound. This means that
Daewoo would have to sell car for a price that makes up for the 12 cents
lost in the UK, but would gain more revenue when trading it to US
dollars.
What if, instead, Daewoo made cars in the U.K. to sell in the U.S.
market? How would your answer above change? Elaborate.
I think that Daewoo would have to sell less to crack a profit if the selling places were reversed. This is due to the fact that the trade value is higher from US dollars to pounds in the UK, but the cost of making the car would be higher is manufactured in the Uk due to increasing consumer prices, and businesses.