What is the difference between spot rates and forward rates?.
Part 4: International Financial Management
Citrus, Inc. is a medium-sized producer of citrus juice drinks in Florida. Until now, the company has confined its operations and sales to the United States, but its CEO, Heidi Sims, wants to expand into Europe. The first step would be to set up sales subsidiaries in Spain and Sweden, then to set up a production plant in Spain, and, finally, to distribute the product throughout the European Union. The firm’s financial manager, George Benson, is enthusiastic about the plan, but he is worried about the implications of the foreign expansion on the firm’s financial management process. He has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of director’s meeting.
To get you started, Benson has supplied you with the following list of questions.
A. What is a multinational corporation? Why do firms expand into other countries?
B. Discuss at least six major factors which distinguish multinational financial management from financial management as practiced by a purely domestic firm. (Please consider doing additional research on this question and document your findings).
C. Discuss exchange rate risk as they relate to multinational corporations.
D. Describe the current International Monetary System. How does the current system differ from the system that was in place prior to August 1971? (Please consider doing additional research on this question and document your findings).
E. What is the difference between spot rates and forward rates? When is the forward rate at a premium to the spot rate? At a discount? (Please consider doing additional research on this question and document your findings).
F. From a managerial point of view, discuss how your responses above will help Citrus, Inc. as they plan to expand overseas.