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 British Bank has been steadily increasing interest rates and on Thursday was increased by 2.25% taking it to the highest its been since 2008.
What is the purpose of the policy move, and what is its risk? The purpose of the policy was to help reduce the impact fo the recession they predict will come. It was also intended to try and reduce inflation. Eventually people will stop spending so much money.
How would it impact Daewoo’s profits? What should the company do? This will impact their profits because it will increase consumer rates as it did by 9.9% the highest they’ve seen in 4 decades which will drive consumers to buy less vehicles. The company should provide low cost sale sin times of downturns so people with steady incomes will still be inclined to buy vehicles.
Foreign Exchange Risk:
Is the British Pound increasing or decreasing in value against the U.S. Dollar? The British pound is decreasing in value and has dropped to 1.12 compared to the US dollar, this is the lowest its been since 1985!
What would that mean for Daewoo’s profits? Because the money that they’re buying cars with is less that the value of an american dollar Daewoo will begin to lose profits. They are no longer getting the same value of money they were once being paid with. It’s like when countries try to pay loans back to US banks that require more money than what once was previously stated due to the devaluation of their currency.
What should the company do? The company should closely watch the monetary policy changes in Britain. The risk of foreign exchange can be mitigated ahead of time by keeping capital lean within Britain.
What if, instead, Daewoo made cars in the U.K. to sell in the U.S. market? How would your answer above change? Elaborate.
If they were making cars in the UK instead the US they would gain more money for selling cars to a foreign country with a higher currency value. During an economic downturn they need to monitor their staffing levels to see who is expendable during the recession. They would be able to still make profits int he United States.