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? 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?

If the bank increased interest rates, prices for everything would go up. This would make all loans on money more diffuicult to get, and will make business expansion more difficult. The intent with this was to make up for some of the inflation, and lower it. However, inflation simply continues to increase prices, and a terrible cycle begins. The best idea would be to take out any loans needed before they get too high.

• 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 has fallen in value since 1985 and this could be conscerning for profits. the region likely won’t generate a ton of revenue in comparison to America. Maybe refocus efforts.

What if, instead, Daewoo made cars in the U.K. to sell in the U.S. market? How would your answer above change? Elaborate.

This could be a very profitable venture, though the increase in profits from cheap labor may not be worth billions of pounds of shipping costs for vehicles.