2015-2016

Referral Coursework for International Business

Environment (BBS_7_IBU)
Instructions to Students

There are 5 questions below. Select one, and answer fully the
different sections.

Upload completed work through the module

Moodle site by 5pm on Monday 4th April, 2016

You should answer the questions in a Word document only. No PDF files,
please.

The coursework files should then be uploaded through the Moodle website.
The final date and time for the upload is given on the Moodle site.

Do not copy and paste diagrams.

Write in paragraphs.

Check your spelling before submission using the spellchecker in Microsoft

Word.

Use diagrams wherever possible to answer the questions. All diagrams

constructed should be constructed in Microsoft Word.

The coursework should be referenced at the end using the Harvard

Referencing style.

Use the eBook, the lecture material, and material from any other relevant
sources to answer the questions.

Before submitting to the coursework link in Microsoft Word, you will have
two chances to submit your work to Turnitin to check for similarity of your
work with those of others.
1

Word limit is around 2,000 words. However, quality of an answer is more

important than the quantity of words.

Question 1
a. The interest rate on South Korean government securities with one-year maturity is 4 percent, and
the expected inflation rate for the coming year is 2 percent. The interest rate on U.S. government
securities with one-year maturity is 7 percent, and the expected rate of inflation is 5 percent. The
current spot exchange rate for Korean won is $1 = W1,200. Forecast the spot exchange rate one
year from today. Explain the logic of your answer. (25 marks)
b. Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price
of beef in the United States is $2.80 per pound and in Britain it is 3.70 per pound.
1. According to PPP theory, what should the dollar/pound spot exchange rate be?
2. Suppose the price of beef is expected to rise to $3.10 in the United States and to 4.65 in
Britain. What should the one-year forward dollar/pound exchange rate be?
3. Given your answers to parts a and b, and given that the current interest rate in the United
States is 10 percent, what would you expect the current interest rate to be in Britain?
(25 marks)
c.

You manufacture wine goblets. In mid-June, you receive an order for 10,000 goblets from Japan.
Payment of 400,000 is due in mid-December. You expect the yen to rise from its present rate of
$1 = 130 to $1 = 100 by December. You can borrow yen at 6 percent a year. What should you
do? (25 marks)

d. You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures
component parts for your U.S. assembly operations. The subsidiary has been financed by bank
borrowings in the United States. One of your analysts told you that the Mexican peso is expected to
depreciate by 30 percent against the dollar on the foreign exchange markets over the next year.
What actions, if any, should you take? (25 marks)

Question 2
a. Explain what the Gold Standard was. Why did the gold standard collapse? (30 marks)
b. Do you think the standard IMF policy prescriptions of tight monetary policy and reduced
government spending are always appropriate for developing nations experiencing a currency
crisis? How might the IMF change its approach? What would the implications be for international
businesses? (35 marks)
c.

Debate the relative merits of fixed and floating exchange rate regimes. From the perspective of an
international business, what are the most important criteria in a choice between the systems?
Which system is the more desirable for an international business? (35 marks)

Question 3
a.

Explain what the Bretton Woods system was. Why did the Bretton Woods system collapse?
(30 marks)

b.

In 20082009, the world economy retrenched in the wake of a global financial crisis. Did the
globalization of capital markets contribute to this crisis? If so, what can be done to stop global
financial contagion in the future? (35 marks)

c.

A firm based in Mexico has found that its growth is restricted by the limited liquidity of the
Mexican capital market. List the firm's options for raising money on the global capital market.
Discuss the pros and cons of each option, and make a recommendation. How might your
recommended options be affected if the Mexican peso depreciates significantly on the foreign
exchange markets over the next two years? (35 marks)

Question 4
a.

In what kind of industries does a localization strategy make sense? When does a global
standardization strategy make most sense? (35 marks)

b.

Discuss how the need for control over foreign operations varies with firms' strategies and core
competencies. What are the implications for the choice of entry mode? (35 marks)

c.

An alternative to using a letter of credit is export credit insurance. What are the advantages
and disadvantages of using export credit insurance rather than a letter of credit for exporting (a) a
luxury yacht from California to Canada and (b) machine tools from New York to Ukraine? (30
marks)

Question 5
a.

How might a company make strategic use of countertrade schemes as a marketing weapon to
generate export revenues? What are the risks associated with pursuing such a strategy? (30
marks)

b.

A chemical firm is considering how best to supply the world market for sulphuric acid. A
manufacturing plant costs about $20 million to construct and requires a moderately skilled
workforce. The total value of the world market for this product over the next 10 years is estimated
to be between $20 billion and $30 billion. The tariffs prevailing in this industry are moderate.
Should the firm favour concentrated manufacturing or decentralized manufacturing? What kind of
location(s) should the firm seek for its plant(s)? (35 marks)

c.

A firm must decide whether to make a component part in-house or to contract it out to an
independent supplier. Manufacturing the part requires a non-recoverable investment in
specialized assets. The most efficient suppliers are located in countries with currencies that
many foreign exchange analysts expect to appreciate substantially over the next decade. What
are the pros and cons of (a) manufacturing the component in-house and (b) outsourcing
manufacturing to an independent supplier? Which option would you recommend? Why? (35
marks)

End of Coursework