Multinational corporations (MNEs) operate globally with several established subsidiaries in foreign
countries. In this project, you will choose a MNE. You will then download the company’s annual
report and analytically research the company to understand its current foreign exchange rate exposure,
and the tools or techniques the company uses to mitigate the risks. Moreover, you will choose a
country in which you will expand your presence and create a new subsidiary. You will need to identify
your capital structure for your new subsidiary, as well as plan for your profit repatriation.
Resources to consider:
http://stat.wto.org/Home/WSDBHome.aspx?Language=E
https://datahelpdesk.worldbank.org/knowledgebase/articles/906519
https://taxfoundation.org/corporate-income-tax-rates-around-world-2014
http://2016.export.gov/fta/index.asp
https://taxfoundation.org/business-taxes/international-taxes/ Specifically, the following critical elements must be addressed: the company is Apple
I. Company Proposal and Background: Provide a brief historical background on the firm
you have selected, including the nature of its products or services.
II.
II. Foreign Exchange Risk Management Analysis: Analyze the firm’s transactions, its
foreign exchange rate risk exposure, and the tools the firm currently uses to mitigate
the risk.
a) Explain the firm’s specific transactions, which are the accounts payable and accounts
receivable, and how these transactions expose the firm to foreign exchange rate risk.
Some firms could be exposed to both of the accounts because they import raw
materials from foreign countries, add value to the product, and then re-export the
product to other foreign countries. However, the net exposure must be only one
account.
b) ) Identify the tools the firm currently uses in mitigating the foreign exchange rate risk.
Occasionally, firms utilize more than one tool to hedge the risk. Some examples of
tools are using foreign debt to hedge the foreign income, or using derivatives such as
currency swaps, futures, forwards, or options.
c) However, most of the time, the company does not fully hedge its exposure to the
foreign currency. You must explain the percentage hedge of its exposure as well as the
hedging time length. Then, you must provide the potential risk to which the company
could still be exposed from the foreign exchange rate.
III. Investments/Subsidiary Expansion: Choose a country to enter to create a new
subsidiary. Determine the capital structure of your new subsidiary, including the
source of funding
a) Provide an explanation of the country in which you chose to create a new
subsidiary. It is possible that the country you selected already has a subsidiary of your
MNE, which is fine.
b) Explain what the capital structure for this new subsidiary should look like. Should
it be the same as the mother company’s? Why? If your subsidiary should have debt,
determine the source of the debt and explain your rationale for choosing the source. IV. Repatriations of Funds: Once your subsidiary turns a profit, evaluate how you will
repatriate your profit. You will need to look into the country in which the subsidiary is
located and determine if it has any restrictions on blocked funds. If so, you must
incorporate the findings into your final decision. Explain if you will repatriate your
profit back annually on all, or only partially, and why.
