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Free «MNC Enters India» Essay Sample

A multinational corporation (MNC), also referred to as a multinational enterprise or an international corporation, is a conglomerate that operates in over one nation (Crabb, 2001). Such corporation manufactures and sells its commodities in different nations. Studies show that MNC greatly contributes in globalization.

Billabong International, a clothing company established in 1973, is a multinational corporation headquartered in Australia (Roth, 2010). Since 2000, the company has been trading on the Australian Securities Exchange. Its main business is retailing, wholesaling marketing, and distribution of accessories, hardgoods, apparel, wetsuits, and eyewear. Billabong sells accessories and surfwear under the Honolua Surf, Palmers Surf, Kustom, and Swell.com (Roth, 2010). In order to market and promote its brands internationally, the company makes important contacts and participates in various events.

In 2011, Billabong had approximately 6, 000 employees globally, and 677 stores in 2012. The company’s sales in 2000 were 225 million U.S. dollars, while in 2011, the sales increased to 1.7 billion U.S. dollars implying major growth. Most of the Billabong’s revenues are obtained from entirely owned operations in various countries in North America, Australia, Brazil, New Zealand, Europe, and South Africa (Roth, 2010).

This paper focuses on how Billabong International can enter the Indian market. It requires the assessment of various factors that may affect the company directly. In regard to this, the paper analyses the movement of currency exchange rates, exchange rate risks, and how they can be managed using various methods. Thus, the company is able to make wise investment decisions.

Question 2

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Exchange Rates (2008-2013)

In relation to the U.S. dollar, the Indian rupee, as shown in the graph, has depreciated by approximately twenty percent. Indian traders who deal with bulk goods evade exchange rate risks, whilst the smaller traders prefer bearing such risks themselves. It implies that goods traded by medium and small traders enter an import slouch. The depreciation of the rupee could have been prevented by a self-effacing involvement in addition to indirect control by the RBA (Reserve Bank of India). The RBA intervened by selling twenty billion U. S. dollars. However, the declining foreign exchange reserve reduces the capability of the bank to intervene decisively.

The Indian currency market is greatly affected by the global economy. The country follows the Liberalized Exchange Rate Management System(LERMS), thus, corporate executives are able to understand the movement of the exchange rate. Such movements can result either in high gains or losses for companies (Wang, 2005). The currency market is influenced by various economic factors, some of them are discussed herein.

Modification of interest rates is one of the economic factors that may influence the exchange rate. Apparently, interest rates determine currency value of any nation (Wang, 2005). For instance, increased rates of interest in the United States result in the appreciation of the US dollar in relation to other currencies including the Indian rupee. When the Federal Reserve Bank (FED) changes the rates of interest, the currency market is greatly affected. In the last two years, changes in the interest rates have been very apparent resulting in the appreciation of the US dollar in relation to the Indian rupee as well as other global currencies.

Another economic factor is the inflow of foreign funds (Wang, 2005). Supply and demand of currency are the determinants of exchange rates. In the Indian market, the confidence of the foreign investors has been boosted by good ratings as well as strong economic fundamentals. The country has big foreign investors, whilst Foreign Direct Investment (FDI) and Foreign Institutional Investors (FIIs) are projected in the future. In the last twenty four months, the Indian market received large foreign funds in terms of US dollars, which resulted in the appreciation of the rupee in relation to the dollar. Also, during this period, the FIIs made a step of withdrawing their funds from the Indian market, which resulted in the appreciation of the dollar in relation to the rupee (rupee depreciated).

Being an importer of oil, India spends huge amount of money on the same. An increase in the prices of oil means that the country has to spend more, a factor the results to the depreciation of the Indian rupee in relation to the USD. The depreciation is also caused by the high demand of USD in order to meet the import liability. In the last two years, the price of oil has increased at an increasing rate, a factor that has not only affected all oil importer countries. These changes in oil prices caused depreciation of the Indian rupee.

Question 3

Contemporarily, many countries have adopted liberalization and globalization, which has increased the sphere and scope of global business. Most of the companies operating in the global business are negatively affected by the high unpredictability of exchange rate. In the recent past, the exchange rate has fluctuated unfavourably, which has had extreme effects on the multinational corporations functioning in India.

Exchange rate risks are either economic exposure, translation exposure, or transaction exposure (Ihrig, 2001). Transaction exposure involves the unfavorable changes in exchange rate between the initiation of transaction and their settlement. This kind of exposure takes place as a result of transaction transfer from one currency to another.

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Translation exposure crops up from the desire of translating foreign currency liabilities or assets into local currency (Allayannis & Ofek, 2001). The aim of this action is to finalize account settlements. MNCs operating in various nations need to prepare combined financial statements in order to have comprehensive knowledge regarding the outcomes of their businesses. Generally, financial statements and accounting records are prepared in the currency of the nation where the MNCs subsidiary is operating. It means that the accounts of the subsidiary businesses have to be translated into the currency of the mother company. However, currency fluctuations generate losses or gains.

Lastly, economic exposure mirrors the degree to which the current future cash flows’ value is imputed by the movements in exchange rates. Such movements impact the competitive position of a multinational corporation affecting the profitability (Ihrig, 2001).

Balance of payment (BOP) of India relies on services exports, remittances, and capital flows. Nevertheless, it is important to offer market participants wherewithal to enable them to embark on forex risk management. Foreign exchange markets can be accessed through hedging of fundamental foreign exchange exposures. Novel hedging instruments encompass foreign exchange forwards, options, and swaps (Crabb, 2001). Previously, hedging was, to a larger degree, allowed on certain currency risk exposures such as those arising from import.

India extends the exchange rate market hedging options, MNC, and the country’s trade. In the recent past, the exchange rate policy and the interest rate policy of the Reserve Bank of India were of main focus. Evidently, hedging options are significant during unpredictable exchange rates (Allayannis & Ofek, 2001). It is the desire of the RBA to improve the markets in order to face the amplified risks as well as the volatility of exchange rates. Exchange rate policy in India has worked on stabilizing the forex market; with the Indian rupee depreciate slowly. However, from March 2012, the rupee began to appreciate in relation to the dollar.

The availability of the hedging tools will help market participant’s hedge on a “dynamic foundation.” It includes the MNCs trading on certain metals to hedge their price on global commodity exchanges (Ihrig, 2001). All together Indian markets incorporate quickly with the entire globe, hedging products provided at worldwide centers. In order to ensure that the MNCs operating in India benefits, commercial exchanges must be harnessed. Although cross currency tools that employ options and futures are available, none of them is denominated in terms of rupee.

From this analysis, there have been apparent exchange rates movements in the last 24 months. Bearing in mind the exchange rate risks associated with such movements and the efforts the RBA makes to control such movements, we can, perhaps, say that in the next 24 months, the Indian rupee will fluctuate at a decreasing rate.

Question 4

Foreign exchange exposures from unpredicted corners influence a company negatively. How to address these exposures is a challenge for most companies. Addressing the exposures necessitates a proactive risk management approach. If the exposures are not managed, they result in fluctuations in both the market value and earnings of the company. A large movement in the exchange rate results to special problems to a firm since it brings a competitive threat from another nation. Sometimes, currency change threatens the viability of the company by bringing in bankruptcy costs to bear. It is recommended that certain costs are bore instead of letting uncertainties result in high costs for the company to bear. Foreign exchange exposure of a company is ignored. It could paralyze the financial state of the company as it not only affects the financial position of the company but the competitive position of the company in the market, as well as its value.

The manner in which a firm manages its foreign exchange risk determines its success. The management of these exposures is multi-staged. The procedure commences with the exposure with the exposure. The exposure is then examined, quantified and approved either daily or weekly to make sure the risk profile of the company is in line with the aim of the exposure management. Companies are required to use hedging techniques to reduce the effects of the exchange rate fluctuations on their cost of operation. It helps to monitor future transactions in foreign exchange while offering stability to the cash flows and earnings. According to studies, managing risks has been made easy by the instruments that enable financial price risks to be transferred to other parties. Also, it is the reason why the derivative instruments’ market has grown rapidly in India. 

The techniques for managing foreign exposure do not manage the risks completely but bring them to a manageable level. Hedging and speculating are the main techniques in which the Forex derivatives are put to use. Hedgers help a company to reduce future risks by helping it to insulate itself against probable future fluctuations. On the contrary, speculators take risks to ensure profitability. The opportunity strategies used in speculating are similar to those employed in the spot markets. The mostly used strategies are based on technical chart analysis, as the Forex markets are said to be trending well. However, some speculators use complex strategies as arbitrage.

 
 
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Hedging strategies are important in a foreign exchange market as they aim at neutralizing shifts in the currency that impact sales revenue. For example, if Billabong International wants to know the amount of revenue it will acquire from its stores in India, it can buy a forex financial contract that will be similar in amounts to its suggested net sales to curd currency fluctuations impacts. 

Question 5

Hedging is crucial to the investors with large stock investors since it aids in upholding positions for extended periods to avoid short term capital gain tax. Hedging helps to minimize investment risks. Therefore, investors should realize the importance of using hedging techniques without wrongly attempting them to profiteer. 

Single transactions could take time. For instance, you may sell goods to a foreign customer who promises to offset the bill in two months. Over the two months, the exchange rate may fluctuate causing an exchange loss or gain. To safeguard the corporation from these kinds of transaction exposure, hedging techniques are used.

If a business is operating in a foreign country, it has to fuse the financial results of its operations. A company suffers translation exposure when it translates its liabilities, income and assets to the local currency. To prevent a company or business from translation exposure, a balance sheet hedging is used. The assets, income and liabilities are matched to minimize the impacts of translation. For instance, the company could minimize its assets dominated by foreign currency if it projects devaluation of the foreign currency. Also, it could increase the liabilities by slowing down its payment to creditors or seeking loans in the native currency.

Economic exposure impact a company’s value. Fluctuation in the exchange rate reduces the current value of future cash flow. Consequently, the value of a company reduces. Measuring the effect of dollar value on a company is almost impossible. If India devalues its currency, then the native corporation in the home country of the multinational corporation will be affected negatively. It is for the reason that the profit earned (in the local currency) would be worthless in the home country of the MNC. In a nutshell, the company should seek to minimize the transaction exposure first before calculating the translation exposure. In managing these risks, it should apply the hedging techniques that will ensure that no more risks are created.

Question 6

The economic figures have revealed that in a number of years to come the economic growth of India could overtake that of China. Also, they indicate that by 2050, the three big economies of the world would be India, America, and China. However, these findings were subject to some admonition linked to the country risk analysis. It is crucial to deliberate these limitations as well as evaluate their impacts on the Indian economy. Identifying the effectiveness of the fiscal and monetary policy in place is very imported. When the ratio of Fiscal Deficit to Gross Domestic Product is more than 4 percent, then the situation should be taken in consideration. The nations that have a ratio of debt to Gross Domestic Product of over 70 percent are perceived as vulnerable. 

The Central Bank of India has maintained a sovereign monetary policy. Additionally, it ensures sound measures for growth and inflation to balance. The fiscal policy however, leaves the financial system barefooted. Presently, the bank is heightening its rates hoping to bridle inflation by grasping the money supply. Inflation has however proven sticky as it is slow to respond to monetary tightening. This problem occurs as the government’s expenditure exceeds its income and is acting as a stimulus. Such growth is enhanced and inflation fueled. Spending by the government is escalating in non-productive regions such as populist social programs and subsidies which do not have effective measurements for delivery and performance.

India’s economic growth prospect is dynamic. One day it looks invincible and it represents future growth. The next day, the same economy seems vulnerable. Long growth projections of the economy are optimistic. Policy paralysis in a complex environment slows down the growth of the economy. Growth projections depend on internal proactive and external macro policy. Given that there is economic growth, current account deficit between 1-3 percent of the Gross domestic product is possibly sustainable. The present as well as near term projection for the present account deficit is 2.7 percent of the Gross Domestic Profit.

A current account deficit poses a huge risk to the economy of India. A significant shift leads to a run on the rupee and consequently, the economy undergoes stress. Therefore, it is important to phase out subsidies and ensure a proficient tax system. The economy of India has a current account deficit and as such foreign investors provide money to the country. Additionally, it has borrowed money from abroad within bounds on a comparative basis.

Besides, it is important to discuss the liquidity of India. Liquidity is a term used to refer to the foreign exchange reserves linked to short term debt and trade flows. The most crucial ratio is subdivided by short term debt. 200 percent is considered a safe level while below 100 percent is termed risky. India has equal to short term external debt. For this reason, the ability of the Reserve Bank of India to intervene and support the rupee when there is a downward pressure. 

   

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