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? Bank of England is increasing their interest rates, as
of September 22, 2022 the interest rate raised 2.25%. This is the
highest since 2008. What is the purpose of the policy move, and what is
its risk? The purpose of this policy move was to try and help with the
impact from future recessions. The risk of this is losing customers, the
increased interest rates might scare people. How would it impact
Daewoo’s profits? What should the company do? I think that this could
impact Daewoo’s profits slightly, but with this new policy move it
should hopefully ensure a better recovery and protection against a
coming recession.
- Foreign Exchange Risk: Is the British Pound increasing or decreasing
in value against the U.S. Dollar? The British pound is weaker than the
U.S. dollar, trading at about $1.12 which is the lowest since 1985. What
would that mean for Daewoo’s profits? Daewoo’s profits will drop, they
are spending more money on buying cars than they are too make profit off
of the cars. What should the company do? The company could drop their
stock and make customers have to order cars before buying them.
Similiarly to how Tesla operates.
What if, instead, Daewoo made cars in the U.K. to sell in the U.S.
market? How would your answer above change? Elaborate.
Daewoo would make more money if they were making cars in the U.K. and
selling them in the U.S. market. This would change my answer ffrom
abovve because Daewoo would make greater profits off of doing this. I’m
sure that it would cost more for Daewoo to start producing their cars in
the U.K. but in the long run it would be more beneficial to them.