Week 9: Real World Applications 8

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?
• The Bank of England has raised its kaey rate another .5%, to 2.25%. This is a new high since late 2008. What is the purpose of the policy move, and what is its risk?
• The changes coming to Britain include the governments freezing energy bills and planning to cut taxed to lessen the pain of the higher cost of living. Although, the pound has fallen to its weakest level against the dollar since 1985. How would it impact Daewoo’s profits? What should the company do? -Since the U.Ks currency has fallen to its weakest level against the dollar the cosumers might be more frugal than before. They might have to increase the price of their products to stay on track with their sales.
• Foreign Exchange Risk: Is the British Pound increasing or decreasing in value against the U.S. Dollar?
• The pound has decreased its value to the U.S. dollar. The economys activity was alreading weakening and the future inflation risks were waning. What would that mean for Daewoo’s profits? What should the company do? -The companies profits will most likely decrease due to the inflation rate. Since inflation is increasing, the consumers will not want to spend more money on their products. The company should keep a close eye on the market, and make good financial decisions. What if, instead, Daewoo made cars in the U.K. to sell in the U.S. market? How would your answer above change? Elaborate.
  
• The U.S. dollar is stronger than ever right now. Considering this I think the company would do well. It could cost more to make in the U.K right now, but they would most likely save money.