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Critically discuss how multinational companies such as HD Products can
manage its operating and transaction exposures by adopting proactive
policies that offset anticipated foreign exchange risks.
Question 5
You are the financial controller of HD Products Berhad, a manufacturer of car stereo
systems headquartered in Shah Alam, Malaysia. The company exports its products
to Brazil, whose currency, the reais (symbol R$) has been trading at R$0.70/RM.
Exports to Brazil are currently 50,000 units per year at the reais equivalent of
RM200 each.
A strong rumor exists that the reais will be devalued to R$0.80/RM within two
weeks by the Brazilian government. Accepting this information as reliable, HD
Products faces a pricing decision which must be made before any actual
devaluation: HD Products may either (1) maintain the same reais price and receive
lower Ringgit, in which case Brazilian volume will not change, or (2) maintain the
same Ringgit price, raise the reais price in Brazil to compensate for the devaluation,
and experience a 20% drop in volume. Direct costs in Malaysia are 60% of the
sales price.
Required
(a) Determine the short-run (one-year) implication of each pricing strategy,
showing all calculations.
(7 marks)
You have been informed that HD Products’ patent expires at the end of six years
and due to the difficult market conditions, the Company has decided not to continue
exporting to Brazil after its expiry. The Marketing Department believes that if the
Company maintains the same price in reais as a permanent policy, volume will
increase at 10% per annum for six years. If HD Products raises the price in reais so
as to maintain its Ringgit price, volume will increase at only 3 % per annum for six
years, starting from the lower initial base of 40,000 units. The Company’s weighted
average cost of capital is 12%. Direct costs in Malaysia are not expected to change
much due to long term component supply contracts. After the reais is devalued to
R$0.80/RM, no further devaluation is expected.
Required
(b) Provide recommendations for an appropriate pricing policy for the
Company, showing all calculations
(8 marks)
(c) Critically discuss how multinational companies such as HD Products can
manage its operating and transaction exposures by adopting proactive
policies that offset anticipated foreign exchange risks.
(10 marks)
(Total: 25 marks)
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The post Critically discuss how multinational companies such as HD Products can manage its operating and transaction exposures by adopting proactive policies that offset anticipated foreign exchange risks. appeared first on Cheapest Academic Custom Papers.
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