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MANAJEMEN KEUANGAN INTERNASIONAL

MINI CASE EURO


MULTINATIONAL FINANCIAL ALAN C SHAPIRO

NAMA KELOMPOK
NADYA RAKASIWI 1526000213
MELLA MUSTIKASARI 1526000189
1. Why does a rise in the dollar hurt Markel? How does a falling dollar help Markel?

ANSWER
With a 70% share of the world market for Teflon-coated cable-control liners, it is
obvious that Markelexports a substantial amount of its output. With Markels export
revenues denominated in foreign currency (andalso determined in foreign currency,
primarily euros it appears) and its costs set in dollars, a rise in the value of thedollar
will either squeeze Markels margins (if it holds euro prices constant) or lower its sales
volume (if it raiseseuro prices to compensate for a stronger dollar). A falling dollar has
the opposite effect as specific euro pricestranslate into more dollars. Alternatively,
Markel has the option of lowering its euro price, while still maintainingits dollar
margins, in order to capture more market share.

2. What does Markel do to hedge its currency risk? Can Markel use hedging to completely
eliminate itscurrency risk?

ANSWER
As the mini-case points out, Markel uses forward contracts to lock in dollar revenues
for the next severalmonths and tries to improve efficiency to survive when the dollar
appreciates (praying does not count in hedging).However, hedging cannot completely
eliminate its currency risk through hedging as much of its risk involvesoperating
exposure. That is, Markels competitive position is affected by changes in the value of
the dollar andother currencies

3. Comment on Markels policy of selective hedging. Are there any speculative elements
involvedin such a policy? Would you recommend Markel continue to follow a policy
of selective hedging?Why or why not?

ANSWER
As discussed in Chapter 10, a selective hedging policy often leads to taking higher risks
byhedging only when a currency change is expected and going unhedged otherwise. If
financial markets areefficient, however, firms cannot hedge against expected exchange
rate changes. Interest rates, forward rates,and sales-contract prices should already
reflect currency changes that are anticipated, thereby offsetting theloss reducing
benefits of hedging with higher costs. The unavoidable conclusion is that a firm can
protectitself only against unexpected currency changes. Moreover, there is always the
possibility of bad timing, asillustrated by Mr. Hobans forward sale of euros when he
guessed wrongly that the euro would continue tofall. In effect, a policy of selective
hedging involves betting that you are smarter than the foreign exchangemarket. This
bet is one that many companies have learned to regret. Companies that really can beat
themarket should probably do this full time as they then would not have to deal with
tough competitors,demanding customers, and difficult employees.
4. What are the basic elements of Markels pricing policy? Does this pricing policy reduce
itscurrency risk? Explain.

ANSWER
Markels basic pricing policy is to charge customers relatively stable prices in their own
currenciesto build overseas market share, while absorbing currency gains or losses. It
also signs contracts in foreigncurrency based on its expectations of where exchange
rates are headed. It sometimes guesses wrong on thesecontracts as well.

5. Does locking in Markels dollar costs of raw materials through multiyear dollar
contractsautomatically reduce the companys currency exposure?

ANSWER
No. Note that Markel is locking in its dollar costs at the same time it is locking in foreign
currencyrevenues. For Markel, this means it will be feast or famine. If the dollar falls
in value, it will earn windfallprofits as its foreign currency revenues translate into more
dollars. If the dollar rises, however, it will losewith the decline in the value of its foreign
currency revenue. Allowing its dollar costs to move with its dollarrevenues on overseas
sales will provide some hedge against exchange rate fluctuations

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