...Blooming Clothing .193 Case 11.3 Blooming Clothing A bumpy path to exports It was nine o'clock on a misty Irish morning in February 1995. Martha O'Byrne cycled down the narrow avenue to the clothing factory of which she was managing director and the main shareholder. Wheeling her bicycle into her small office, she wondered if Janet Evans had called yet. Janet, the chief buyer with the Mothercare chain of stores in the UK, had promised to phone her that morning, to let her know if she would be placing a further order with her company. Listening to the messages on her answering machine, Martha remembered the path that she had taken to establish her own enterprise. Blooming Clothing, the small company that Martha O'Byme owns and manages, is situated in the Liberties, an aid and historic part of Dublin, Ireland. Established in 1985, the firm employs 80 people manufacturing maternity wear for the Irish and export markets. Martha O'Byrne had come to this business by an unusual route. Having established herself as a successful merchant banker, she had been considering setting up her own business for same time. 'Women, I think, can have a mid-life crisis at the menopause, but I got mine when I was 28', she recalls. In 1984, a shopping trip with her pregnant sister-in-law revealed that the maternity wear available on the Irish market was dowdy and depressing. In that moment, the idea for Blooming Clothing was conceived. Martha resigned from her position in the investment bank in 1985...
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...Book I Of the Causes of Improvement in the productive Powers of Labour, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People Book I, Chapter I Of the Division of Labor*16 I.1.1 The greatest improvement*17 in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour. I.1.2 The effects of the division of labour, in the general business of society, will be more easily understood, by considering in what manner it operates in some particular manufactures. It is commonly supposed to be carried furthest in some very trifling ones; not perhaps that it really is carried further in them than in others of more importance: but in those trifling manufactures which are destined to supply the small wants of but a small number of people, the whole number of workmen must necessarily be small; and those employed in every different branch of the work can often be collected into the same workhouse, and placed at once under the view of the spectator. In those great manufactures, on the contrary, which are destined to supply the great wants of the great body of the people, every different branch of the work employs so great a number of workmen, that it is impossible to collect them all into the same workhouse. We can seldom see more, at one time, than those employed in one single branch. Though in...
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...U.S. to the United Kingdom. Mesa invoices the exports in pounds and converts the pounds to dollars when they are received. The British demand for these frames is positively related to economic conditions in the United Kingdom. Assume that British inflation and interest rates are similar to the rates in the U.S. Mesa believes that the U.S. balance-of-trade deficit from trade between the U.S. and the United Kingdom will adjust to changing prices between the two countries, while capital flows will adjust to interest rate differentials. Mesa believes that the value of the pound is very sensitive to changing international capital flows, and is moderately sensitive to international trade flows. Mesa is considering the following information: The U.K. inflation rate is expected to decline, while U.S. inflation rate is expected to rise. British interest rates are expected to decline, while U.S. interest rates are expected to increase. 1.Explain how the international trade flows should initially adjust in response to the changes in inflation (holding exchange rates constant). Explain how the international capital flows should adjust in response to the changes in interest rates (holding exchange rates constant). Holding exchange rates at a constant rate would allow for Mesa Company to export there products to the United Kingdom and gain a significant profit. The exchange rate comparison for the British pound and the United States dollars is evaluated at 0.99967 to U...
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...decline in inventories?. a. Point 1 b. Point 2 c. Point 3 d. Point 4 e. Point 5 4. From the LM curve below, At what point (1,2,3,4 or 5) will the economy be located if people are holding more money than they desire? a. Point 1 b. Point 2 c. Point 3 d. Point 4 e. Point 5 5. From the LM curve below, At what point (1,2,3,4 or 5) will the economy be located if the interest rate is below the equilibrium level and people are holding less money than they desire? a. Point 1 b. Point 2 c. Point 3 d. Point 4 e. Point 5 6. Using demand and supply analysis to assist you, what are the effects on the exchange rate between the British pound and the Japanese yen from: a decrease in Japanese interest rates a. The yen...
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...Trading Strategy Our team was assigned to be in the position of a corporation. Our primary objective was to raise fund. We needed to raise 19.7billion of Japanese Yens and 425million of British Pounds with 790million of Euros. Our secondary objective was to speculate and make a profit for the corporation. As being a price taker, we needed to take whatever quotes given by banks or, if we called up corporations, and corporations. So we had to no control over the spreads of any currency. As far as our primary objective was concerned, we tried to take advantage of the volatility of the market to obtain, we hoped, the most favourable deals in order to use the minimum amount of Euros to obtain the maximum amount of Japanese Yens and British Pounds. Our market view was closely linked with our speculative strategy. We anticipated that British Pound would be depreciating against the US Dollar as well as other currencies concerned in the dealing section in the short term because investors were expecting considerable rates cut would likely to be implemented by the Bank of England and the European crisis seemed to be being dealt with and investors were trying to take advantage of positive news about the crisis. Due to the aforementioned points, we chose to use Euro or US Dollar to speculate. Since we were given Euro as our starting currency, we did not need to implement any transaction, we could just keep Euro and observe the movement of this currency so as to make adjustments. We also...
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... Hedging using Foreign Currency Derivatives Shiela Penny is the Chief Financial Officer [CFO] of SALEM Manufacturing, a U.S. based manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a turbine generator to Crown, a British firm for One million pounds. This single sale is quite large in relation to SALEM’s present business. SALEM has no other current foreign customers, so the currency risk of this sale is of particular concern. The sale is made in September with payment due three months later in December. Shiela Penny has collected the following financial market information for the analysis of her currency exposure problem: Spot Exchange rate: $1.5640 per British pound. 1,000,000 x 1.5640 = 1,564,000 Three month forward rate: $1.5549 per pound 1,000,000 x 1.5549 = 1,554,900 SALEM’s cost of capital: 16% U.K. Annual borrowing interest rate: 12.0% (or 3.0% per quarter) U.K. Annual investment interest rate: 10.0% (or 2.5% per quarter) U.S. Annual borrowing interest rate: 12.0% ( or 3.0% per quarter) U.S. Annual investment interest rate: 8.0% (or 2.0% per quarter) December put option in the over-the-counter (bank) market for 1,000,000 British pounds; Strike price $1.55 (nearly...
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...direct quote for dollars in London? Answer. £500,000 cost £500,000 x $1.1115/£= $ 555,570. The direct quote for the dollar in London is just the reciprocal of the direct quote for the British pound in New York or 1/1.1115 - 1/1.1110 = 0.8997-0.9001. 3. Suppose the quote on British pounds is $1.624-31. a. If you converted $10,000 to British pounds and then back to dollars, how many dollars would you end up with? Answer. For $10,000, you would buy pounds at the price of $1.631, giving you £6,131.21 ($10,000/1.631) and resell them at the bid price of $1.624. The latter transaction would yield $9,957.08, resulting in a round-trip cost of $42.92. b. Suppose you could buy pounds at the bid rate and sell them at the ask rate. How many dollars would you have to transact in order to earn $1,000 on a round-trip transaction (buying pounds for dollars and then selling the pounds for dollars)? Answer. For every pound you could buy at the bid and sell at the ask, you would earn the spread of $0.007. To earn $1,000, you would have to transact £142,857.14 ($1,000/$0.0007). At the current bid rate of $1.624, this is equivalent to $232,000 (142,857.14 x $1.624). 4. Calculate the 30-day, 90-day, and 180-day forward discounts for the British pound. Answer. Here are the relevant rates for the pound: Spot: £1 = $1.8220 30-day forward: £1 = $1.8180 90-day forward: £1 = $1.8086 180-day forward: £1 = $1.7949 The 30-day forward discount is: [($1.8180 -...
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...German marks. Note that Fred is British and he works in British pounds, not dollars. METHODOLOGY: Fred can compare various financial market instruments that are available for hedging the exchange rate risk in the two transactions. In addition, he can consider broader methods for dealing with exchange rate risk. ANALYSIS: Let us examine each transaction separately. The sale of furniture to Jean Marnier will result in a cash inflow of 2 million French francs in 6 months. Given the financial information quoted by Barclays Bank, Fred can use a money market hedge, a forward contract, or an option hedge to assure a maximum return on the sale. The forward market hedge involves contracting with Barclays Bank to sell francs and buy pounds in 6 months. If Fred does this today (August 1996), he will receive: FF 2 million x (1 pound/FF 8.76) = 228,311 pounds in 6 months. The present value of these funds can be calculated by discounting the value at Fred’s cost of borrowing in pounds: 228,311 pounds / (1.04625) 218,218 pounds today The discount factor is 1 plus Fred’s cost of borrowing for 6 months, i.e., 0.0925/2 = 0.04625. The money market hedge involves obtaining a 6-month financial liability to offset the 6-month account receivable. The only such instrument available in the case is a bank loan, that will cost 6.0% per year plus a spread or margin of 2% per year. Once the loan is taken out, the proceeds must be converted into pounds to create the hedge. The amount...
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...Aditya Bansal HW 2 Chap 5 Q1.Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect? ANSWER ($1.66 – $1.73)/$1.73 = –4.05% Therefore the Expected depreciation is 4.05 percent Q2.Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? ANSWER: If U.S inflation rate becomes high relative to Canadian dollars then the demand for Canadian dollars should increase, supply of Canadian dollars for sale should decrease, and the Canadian dollar’s value should increase. Q3. Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound? ANSWER: If U.S interest rates fall relative to British interest rate then the demand for pounds should increase, supply of pounds for sale should decrease, and the pound’s value should increase. Q4. Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value...
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...Greece, and Spain. In 2001, the company’s total profit was EUR2.8 billion. The composition of this are 5 percent is originated from Asia, 2 percent is from Latin America, 26 percent originated in Europe outside France, and the rest is coming from France. The net sales of the company EUR69.5 billion came from Asia (7 percent), Latin America (12 percent), Europe outside France (32 percent) and France (49 percent). This was the first year that the total sales from outside France exceed the total sales coming from France. In 2002, Morgan Stanley and UBS-Warburg suggested that Carrefour should consider borrowing British pounds sterling in order to take advantage of a borrowing opportunity in that currency. Carrefour would issue EUR750 million bonds. The investment bankers expected that the 10 year bonds would be priced at a coupon rate of 5.25 in EUR, 5.375 in British pounds, 3.625 in Swiss francs, or 5.5 in U.S. dollars. II. STATEMENT OF THE PROBLEM Carrefour have decided to issue a 10 year bond for debt-financing of EUR750 million. But the company needs to choose on which currency they would borrow. The...
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...Carrefour S.A. In the summer of 2002,with total sales of (euro) EUR53.9 billion from more than 5,200 stores, Carrefour S.A. was Europe’s largest retailer. Over the past four years, Carrefour’s growth had occurred almost entirely outside France and included several large acquisitions. In the past, Carrefour management had generally financed company growth through securities denominated in the currency of business operations. Its investment banks, Morgan Stanley and UBS-Warburg, however, had recently suggested that Carrefour consider borrowing in British pounds sterling in order to take advantage of a borrowing opportunity in that currency.With a debt-financing requirement of EUR750 million, the bond issue would be one of Carrefour’s largest. Now, in August 2002, the investment bankers expected that the 10-years Carrefour bonds would be priced at a coupon rate of 5 ¼ in euros , 5 3/8 in British pounds, 3 5/8 in Swiss francs, or 5 ½ in U.S. dollars. Carrefour In 1963, Carrefour altered the world of retailing with the introduction of the “hyper-market” concept in the small French town of Sainte-Genevieve-des-Bois, southeast of Paris. This format combined a supermarket , drugstore, discount store ,and gas station into one massive, one-stop-shopping megastore. The original store had 2,500 square meters of retail space, 12 checkouts, and 400 parking spaces. The company expanded rapidly in France and beyond, opening its first store outside France (Belgium) in 1969, and outside...
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...is also an investor, philanthropist, chairman of Soros Fund Management and Open Society Institute. What inspire me most about him are his remarkable history when he did an excellent job on currency speculation in 1992, and also his own way of thinking. According to one of The Telegraph articles, Britain had its fell on European Exchange Rate Mechanism in 1992, and George Soros thought the pound sterling should have been devalued since it had been struggling with the ERM too high at a rate. At that time, he also knew that the Bundesbank would agree to devaluate both pound sterling and the Italian lira since the terrible impact that British high interest rates had on asset prices. George Soros then thought of the way that he could get a profit from the devaluation situation. He borrowed pound sterling in a massive amount, approximately £6.5 billion according to the report. Next, he converted them into a combination of Deutschmarks and French francs. Then on 16 September 1992 or also known as Black Wednesday, his bet paid off. The British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism because it surpassed its lower limit. George Soros made over US $1 billion profit by paying back his original borrowings. This is a compelling case for me because even though shorting stocks is common out there, he did his betting incredibly well. I personally...
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...Executive Summary: Jaguar PLC, 1984 This case explores the operating exposure of Jaguar PLC in 1984, just as the government is about to relinquish control and take the company public via an IPO. The primary concern of the CFO is that Jaguar sells over 50% of its cars in the US, while its production costs and factories are U.K.-based. This currency mismatch creates operating exposure for the firm that needs to be hedged. While the current trend in the USD has been higher, the markets are expecting a pullback in the currency. With labor accounting for a significant portion of the cost base for luxury car industry, it is unlikely that the expense will decline in the near future. Again this creates a potential liability in the matching pf the cash inflows and outflows. Given Jaguar's primary competitors have operating expenses in DEM, the CFO should also be concerned with the competitive advantages that are associated with favorable exchanges rate when compared to the competition. Thus, there also exists the issue of the GBP/DEM exchange rate. The overarching themes and underlying issues that must be addressed in order to address Jaguar's currency exposure are: •Valuation of the risks associated with firms with multiple currency exposure •Risks associated with revenue streams and expenses in different currencies •Valuation and assessment of highly competitive niche luxury car markets •Supply chain effectiveness and labor trends in the automotive industry •Strategic positioning...
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...1. What gives rise to the currency exposure at AIFS? American Institute for Foreign Study (AIFS) is a student exchange organization. It organizes exchange programs in education and culture throughout the world with two of its major divisions serving American students traveling abroad in the Study Abroad College division and High School Travel division. AIFS receives their revenues in American Dollars (USD) but incurs their costs and expenses in a foreign currency, mainly in the Euro (EUR) and the British Pound (GBP). AIFS’s currency is exposed to changes in the foreign exchange rate, therefore their gain or loss is determined by the appreciation or depreciation of the American dollar in the foreign market. In order for AIFS to protect its assets they need to hedge their currency in forward contracts and options to reduce currency exposure risks. There are three types of currency risks: the bottom-line risk, the volume risk and competitive pricing risk. AIFS starts to hedge foreign currencies between 6 months and 2 years prior to the main pricing date and the implement forward contracts and currency options (primarily forward contracts) to hedge currency exposure risks. AIFS establishes its pricing in advance and guarantees that price, so if the market changes they will still honor the set price. The Bottom-line Risk Adverse changes in exchange rates against the dollar without hedging could increase costs because AIFS requires large sums of money to cater to their clients...
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...exchange rates constant). With the expectation of a decrease in the British inflation rate when compared to the United States, the response of international trade flows will be a decrease in British consumers’ interest in U.S. products. As a result, the U.S. will be able to export less into Britain. At the same time, British products exported to the U.S. will increase. Since the U.S. will be exporting less and importing more from the U.K., the U.S. trade deficit will increase, as prices will rise and U.S. exports will be more expensive for foreign countries. This will place upward pressure on the pound’s value and downward pressure on the U.S. dollar. However, if British interest rates are expected to decline and U.S. interest rates are expected to increase, then British investors will find the U.S. interest rates more appealing than their own and will move their capital from Britain to the U.S. As a result, international capital flows will flow in the U.S. and out from the U.K. The investors will receive a higher rate of return if their capital is invested in the U.S. The increase in interest rates will place downward pressure on the pound’s value and upward pressure on the U.S. dollar. The increase in interest rates may be enough to counter-act the increase in U.S. inflation causing the international trade flows to remain steady. 2. Using the information provided, will Mesa expect the pound to appreciate or depreciate in the future? Explain. The equilibrium...
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