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Question 1

1.

Is Sports Exports Company a multinational corporation?

Multinational corporation are defined as firms that engage in some form of international business Sports Exports Company decided exporting low priced footballs to sporting goods distributors in foreign countries Exporting is minimal risk because the firm does not place any of its capital at risk

Agency costs is costs that arise from the inefficiency of a relationship between an agent and a principal. Logan was to create firm that would produce low priced footballs by himself and sell it on a wholesale basis to various sporting goods store in the U.S Owner and manager are the same The owner does not have manager who are based in other countries

2. Why are the agency costs lower for Sports Exports Company than for most MNCs?

Does Sports Exports Company have any comparative advantage over potential competitors in foreign countries that could produce and sell footballs there? Comparative advantage is a situation in which a country can produce a good at a lower opportunity cost than a competitor Sports Exports Company will be the first firm engage popularity of footballs in foreign countries Sports Exports Company produce the top-ofthe-line footballs in the U.S. market in that it sells the footballs at a low price

3.

4. How would Jim Logan decide which foreign markets he would attempt to enter? Should he initially focus in one or many foreign markets?

Exchange rate risk When Jim Logan want to expand his business into foreign market, it will involved more than one country currency. Since the spot rate fluctuate all the time, thus, he must consider the volatility of the exchange rate which could make his business to loss. Economic conditions Income of the country which affect the demand of the football. When economy performance weak, people not willing to spend more money, therefore, demand of football reduce. State of competition must be consider. If the existing competitor already dominate the market, it will create a barrier to entry.

Since Jim Logan has just start his business, he may not have sufficient fund to invest in many foreign market. Beside, a multinational business must have the knowledge to manage exchange rate risk among different country. Moreover, expand his business in many foreign market will increase the uncertainty, for example, government regulation change overtime. Therefore, he should initially focus in one foreign market and thereby enhance his distribution channel.

5. The Sports Exports Company has no immediate plans to conduct direct foreign investment. However, it might consider other less costly methods of establishing its business in foreign markets. What methods might the Sports Exports Company use to increase its presence in foreign markets by working with one or more foreign companies?

Licensing Provide its technology in exchange for fees or some benefit. Franchising Provide a specialized sales or services strategy. A management team is needed to assist franchisee to set up the business. Joint ventures Two or more firm come together share their resources to operation a business.

By using Joint venture method, venture are sharing distribution channel also comparative advantage, so Sports Exports Company can easily increase its presences in foreign market by working with foreign companies. Beside, it can learn technology from each other. Moreover, a spread in ownership can also diversified the risk.

Question 2

Which argument do you support? Offer your own opinion on this issue.

From this argument, there is a trade-off between issuance of share in local and across different countries. Whether dilute the stock liquidity in secondary market is depend on the amount of stock offering by the firm. A small amount of IPO is better issue in single country because to maintain the liquidity of the stock in secondary market. However, a large amount of IPO is suitable issue in several country because it can be more easily to digested. But it should not issue its stock in many country, perhaps issue its stock in few country that the business are commonly operate.

Question 3

1. Explain how the Sports Exports Company could utilize the spot market to facilitate the exchange of currencies. Be specific. 2. Explain how the Sport Exchange Company is exposed to exchange rate risk and how it could use the forward market to hedge this risk.

The Sports Exports Company would have an account in a commercial bank that have provide foreign exchange services. Every month, the bank receive the payment from British distributor which denominated in British pounds and then convert British pounds into U.S dollars according to the spot rate.

The Sport Exchange Company is exposed to exchange rate risk because either the value U.S dollar or British pounds change overtime. A depreciate in British pounds will cause the conversion of British pounds into U.S dollars become lesser. The Sport Exchange Company can use forward contract to hedge the risk by lock in the future rate. Thus, they do not have to worry about fluctuation in the spot rate until the time of their future payment.

Question 4

4.Why do you think the terrorist attack on the U.S. was expected to cause a decline in U.S. interest rates? Given the expectations for a potential decline in U.S. interest rates and stock prices, how were capital flows between the U.S. and other countries likely affected?

U.S economy weakened Investors feared that more firms might default investment decrease AD reduce output reduce IS shift to the left Interest rate reduce Domestic interest rate lower than foreign interest rate Foreign interest rate become more attractive Demand of the U.S dollar will decrease Value of U.S dollar will depreciate

U.S goods will be cheaper relative to other countries Export increase Capital flows will reduce

Question 5

5.Why do interest rates vary among countries? Why are interest rates normally similar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of one country could be slightly higher than that of the government interest rate of another country, even though the euro is the currency used in both countries.

Interest rate in any particular country are dependent on the demand for funds by borrowers, relative to the supply of available funds that are provided by savers A country that experience a large demand by borrowers and very small supply will have relatively high interest rate Conversely, a country that experience a small demand by borrowers and very large supply will have relatively low interest rate The supply and demand conditions for the euro are control by all participating countries in aggregate and this can be avoided speculators use the difference between the interest rate to speculative make profit the government interest rate in one country that uses the euro could be slightly higher than others that use the euro if it is subject to default risk and the higher interest rate would reflect a risk premium

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