international business unit IV assignment and DQ question

Unit IV Assignment

For this assignment, you will practice calculating exchange rates and examine some of the key factors that have an impact on foreign exchange. Part 1 does not need to be done only part 2. I uploaded whole assignment as well as copied it here.

DQ question

Many financial newspapers or websites say that the U.S. dollar is the strongest currency in the world. Think about the factors that affect exchange rates, and make a case that our currency should or should not be the strongest. In your opinion, what are the advantages to having a strong currency versus a weak currency?

Unit 4 assignment

Part 1:

Your company is deciding to expand to the following countries, and you and two other managers will have to visit these countries to set up operations. You have $1,500.00 to convert in each currency. Compute the exchange amount for each, and complete the table.

Country/Currency

USD value for 1 unit of another currency (as of 2/17/16)

Exchange amount

Japanese yen

$0.008754

Euro

$1.1159

€

British pound

$1.4398

While you are visiting each of these countries, you have to buy supplies and equipment for your operations. You want to determine what it is costing you in U.S. dollars. Utilizing the same exchange rates given above, compute the costs into U.S. dollars, and complete the table:

Japanese yen

Computer Ұ167,000.00

$

Euro

Desks & chairs €1,125.00

$

British pound

Printer £575.00

Part 2:

Pedro in Costa Rica wants to purchase some wild Atlantic salmon from Hans in Iceland. The fish are purchased in Iceland’s currency, the krona. Pedro’s brother works in a bank and will take care of the transactions free of charge. Pedro has 1,000,000 colons to start with. (There is no transaction fee, and shipping is not calculated at this point.)

How much krona does he have to work with?

Answer:

Country/Currency

USD $ value for 1 unit of another currency (as of 2/17/16)

Euro € value for 1 unit of another currency (as of 2/18)

Costa Rica colon CRC

$0.001909

€0.001745

Iceland krona ISK

$0.00788

€0.007062

The next day Hans decides to purchase some bananas from his new trading partner in Costa Rica. Han’s sister works for an import/export agency and can arrange the transaction in euros with no fee. Hans takes all of the krona he received from Pedro and proceeds to convert his currency to colon. (Note, one country’s currency experienced some weakness overnight.)

How much colon does he have to work with? List your steps and the results you achieved with each step. Also, explain some factors that could cause the country’s currency to weaken.

Answer:

MBA 6601, International Business 1

Course Learning Outcomes for Unit IV

Upon completion of this unit, students should be able to:

7. Calculate the implications of foreign exchange rates.

Reading Assignment

In order to access the following resource(s), click the link(s) below:

Katz, D. (2016). Treasurers fret over currency risks. CFO, 32(1), 10–11. Reading from

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc
t=true&db=bth&AN=112941625&site=ehost-live&scope=site

Weller, M. (2015). The real forex problem. Modern Trader, 53. Retrieved from

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc
t=true&db=bth&AN=112416214&site=ehost-live&scope=site

Unit Lesson

Global Foreign Exchange (FOREX) Markets

Virtually every nation in the world has currency. The United States has its dollar, South Africa has its rand,
Russia has its ruble, and Vietnam has its dong. Foreign exchange is both a noun and a verb. As a verb,
foreign exchange means to exchange one currency for another. As a noun, foreign exchange is money held
in an account denominated in the currency of another nation. Usually, central banks and multinational
companies have funds designated as foreign exchange. The global market in which such transactions take
place is the foreign exchange market.

An exchange rate is the price of a currency designated in the number of units of one currency that buys one
unit of another currency. Let’s take a look at a true story about John that shows how the exchange rate differs
over time from one currency to another. In the summer of 2015, during a trip to China, John decided to
purchase $1,000 worth of Chinese currency, the yuan. It was a spur of the moment decision, and John was
treating it like an adventure. After all, back in the United States, John could always go to an airport currency
dealer and get his money back if he needed the dollars. John walked into the Chinese bank across from his
hotel and for $1,000 U.S. purchased 6,299 yuan plus a few coins. The bank charged a 1% transaction fee,
which means that John exchanged $990, and received 6,299 yuan. Based on that transaction, the exchange
rate calculates at approximately 6.3626 yuan per dollar. John still has the 6,299 yuan, and the exchange rate
seven months later is 6.5012 yuan per dollar. His investment is now valued at $969. Here is a breakdown of
the investment.

UNIT IV STUDY GUIDE

Financial Markets

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=112941625&site=ehost-live&scope=site

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=112416214&site=ehost-live&scope=site

MBA 6601, International Business 2

UNIT x STUDY GUIDE

Title

John walks into Chinese
bank to buy yuan

$1000

Bank charges 1%
transaction fee

$10

Remainder goes to
purchase yuan

$990 Ұ6,299 $1 = Ұ6.3626

7 months later $1 = Ұ6.5012

Approximate value of
John’s yuan

$969

Let’s consider why foreign exchange is so important to international trade. Say that a produce broker in
Iceland wants to buy bananas from Costa Rica. There is not a direct foreign exchange market for Iceland’s
krona and the Costa Rican colon. However, there is an exchange market for the colon to the U.S. dollar and
the U.S. dollar to the krona. Two transactions later and the produce broker has the right kind of currency to
buy the bananas. An interesting side note is the U.S. dollar remains the dominant vehicle currency in foreign
exchange transactions; it was on one side of 87% of all trades as of 2013 (Bank for International Settlements,
2013). Because the U.S. dollar is in so many transactions like this, banks keep a large reserve of dollars,
hence the moniker, the world’s reserve currency.

According to the Bank for International Settlements, foreign exchange markets averaged $5.3 trillion per day
in 2013, growing 8% per annum for the previous six years. FX swaps and spot trading accounted for 80% of
the activity (2013, p. 3). Besides the U.S. dollar, the Euro and the Japanese Yen were the most used
currencies.

FOREX Instruments

FOREX has two purposes. One purpose is to carry on international trade; to arrange payment for products in
other countries. The second purpose is as an investment; to take advantage of a country’s currency as it gets
stronger or weaker due to internal and external political policies. The instruments listed here are essentially
contracts to deliver units of currency under different conditions.

FX swap: This is when one currency is traded for another currency on one date and traded back later.
According to the Bank for International Settlements, FX swaps account for 42% of FOREX trading (2013, p.
8).

Spot transactions: These transactions involve the exchange of a specific amount of currency for a specific
exchange rate on a current date such as today or tomorrow. Spot trading accounts for approximately 38% of
FOREX trading (Bank for International Settlements, 2013, p. 8).

Forward transactions: These transactions involve the exchange of a specific amount of currency for a
specific exchange rate for a date in the future. Forward transactions account for approximately 13% of
FOREX trading (Bank for International Settlements, 2013, p. 8). These transactions are hedging strategies for
when the buyer is forecasting that one currency will weaken in relation to another currency. Hedging
strategies are discussed in more detail later in this lesson.

Currency swaps: This usually refers to assets, such as bonds, based in foreign currencies. The value of a
bond in a foreign currency depends on (1) the interest rate it offers and (2) the expected change in the
currency’s exchange rate against other currencies. Currency swaps, options, and other products make up the
rest of the FOREX trading (Bank for International Settlements, 2013).

Who Buys Foreign Exchange?

There are a variety of buyers and sellers in the foreign exchange market. Each participant has different
needs, which makes for a diverse market. The major participants are commercial banks, corporations that
engage in international trade, nonbank financial institutions (e.g., insurance companies), and central banks.

MBA 6601, International Business 3

UNIT x STUDY GUIDE
Title

Individuals, such as our friend John, may also participate, but such cash transactions are an insignificant
fraction of the total foreign exchange market.

Factors That Affect Exchange Rates

Exchange rates play an important part in a country’s level of trade. The more trade a country can achieve, the
greater the GDP, the higher the standard of living, and the more influence it has over neighboring countries. A
currency with a higher exchange rate is a strong currency. A stronger currency makes a country’s exports
more expensive and imports less expensive. The current account balance, which is a net of exports minus
imports, goes down with a strong currency. Consequently, for purposes of trade, it is sometimes helpful to
have a weak currency. Several variables affect the strength of the currency.

Inflation: A country with stable prices will have a stronger currency than a country with higher inflation.
Inflation indicates currency debasement is occurring by money printing (Daniels, Radebaugh, & Sullivan,
2015).

Interest rates: Increasing interest rates is one way to reduce inflation. Increasing interest rates reduces the
demand for currency since borrowing money costs more. As borrowing costs go up, demand for money goes
down. The reduced amount of currency reduces the demand for products, which reduces inflation. Increasing
interest rates increases the strength of the currency (Daniels et al., 2015).

Current account balance: As stated earlier, the net between exports and imports is the current account.
Imports are products coming into the country, paid for by money going out of the country. Exports are just the
opposite, and trading partners send money to pay for the products that we send them. A current account
deficit suggests that more money is going out of the country than is coming in. This is in line with a country
living beyond its means. A country with a current account surplus will likely have a stronger currency (Daniels
et al., 2015).

Public debt: Deficit financing is one way for a country to finance large-scale infrastructure projects. While
these projects stimulate the domestic economy, foreign investors remain cautious about investing where
public debt is high. The main reason is that high public debt encourages a government to print money, which
results in inflation. As stated earlier, inflation indicates currency debasement. Low public debt encourages a
stronger currency (Daniels et al., 2015).

Economic performance and political stability: Foreign investors prefer countries with economic
performance and political stability. This indicates that the economy is functioning with acceptable inflation,
interest rates, current account balance, and public debt. This suggests low political risk. Countries with low
political risk will usually have a strong currency (Daniels et al., 2015).

Exchange-Rate Agreements

The IMF (International Monetary Fund) recognizes three types of exchange rates.

Hard Peg: Fifteen percent of the countries in the world lock their currency into a direct relationship with
another currency and hold it steady (International Monetary Fund, 2014). Examples abound in which small
countries that trade a lot with a nearby large country set the exchange rate so that it does not vary. Take El
Salvador for example, it has no currency of its own but uses the U.S. dollar exclusively as its currency. In
Europe, a few European countries use the euro as their one and only currency. Some countries do have their
own currency but maintain the same ratio with the other country’s currency despite its strengthening or
weakening.

Soft Peg: Forty-six percent of the countries in the world have adopted the policy of pegging their currency to
another country’s currency or a basket of currencies. However, they usually allow the exchange rate to vary
plus or minus a few percent (International Monetary Fund, 2014). The Chinese yuan fits into this category as
it is pegged to the U.S. dollar with approximately a 2% variation.

Floating Arrangement: Approximately 39% of the countries in the world allow their currencies to float
(International Monetary Fund, 2014). In other words, their currency has no ties to another nation’s currency.
The currencies in this category generally change according to the factors identified earlier in this lesson, but

MBA 6601, International Business 4

UNIT x STUDY GUIDE
Title

sometimes the currencies are subject to market manipulation. A country’s central bank can buy up excess
currency with foreign exchange funds, making the currency stronger on a temporary basis.

Hedging Strategies

Hedging strategies are simply financial plans to avoid unwanted exchange-rate fluctuations and to take
advantage of forecasted exchange-rate trends. It is important for companies that deal in international trade to
understand how to forecast the strength or weakness of a particular currency. In general, the best predictors
of future exchange rates are interest rates for the short-term, inflation for the medium-term, and current
account balances for the long-term. Hedging strategies can affect business operations positively by
forecasting exchange-rate directions.

Marketing decisions: As one country’s currency weakens, and another country’s currency strengthens, the
products in one country become cheaper while the products in the other country become expensive. Tourism
is one great example of how this works. As the U.S. dollar gets stronger, and the euro becomes weaker, trips
to Europe become much more affordable. This works because the euro and the U.S. dollar are free floating. If
a currency were pegged to the other, the currencies would stay relatively the same to each other.

Production decisions: Companies with multiple factories around the globe will route production to those
countries with a weak currency. Shortly after NAFTA became law in January of 1994, the Mexican peso was
devalued. This devaluation encouraged American companies to move much of their high-cost North American
production facilities to Mexico.

Financial decisions: Exchange rates affect the cost of remitting funds over national borders, sourcing
financial resources, and reporting financial results. Where possible, companies use strong currencies to
purchase weak currencies to pay bills and borrow money. Weak currencies come from countries with the
lowest interest rates, thus borrowing money there is usually more cost effective. For reporting purposes, sales
growth in international markets is enhanced when the weak currency is strengthening in relation to the home
currency.

Global Capital Markets

Raising capital to fund a company’s operations is always critical. Raising capital in equities and debt in the
international market is competitive to the cost of raising capital in the U.S. market. This happens in several
ways.

Eurocurrency: This is also known as an offshore currency and is any currency banked outside its country of
origin. For example, the Eurodollar is a certificate of deposit in U.S. dollars in a bank outside the United
States. This market usually settles the need for short-term or medium-term debt. Eurocurrencies are usually
debt instruments ranging from one year to less than five-year terms. The major sources of Eurocurrencies are
foreign governments, multinational corporations, and European banks. The attraction to this source of money
is that interest rates are usually lower than domestic interest rates (Daniels et al., 2015).

International bonds: These are long-term sources of funds. Foreign bonds are sold to buyers in a foreign
country, but their value is denominated in the currency of the country of issue. For example, a bank in China
may sell a foreign bond to someone in New York, but the value of the bond and the monthly payment would
be in yuan. A Eurobond or offshore bond has characteristics similar to the Eurocurrency. A bank in China
could sell a bond to someone else in New York, but the value of the bond and the monthly payment would be
in U.S. dollars. The advantage of this market is that either type of bond is less expensive than domestic
markets and the investors are worldwide (Daniels et al., 2015).

Equity capital: The sale of stock is another way to achieve capital. Private placements or initial public
offerings can happen internationally—just as they can domestically. One source of big money is the sovereign
wealth funds that are state-owned investment funds from various nations. Throughout the world, there are 60
stock market exchanges with over 17 in each Europe and Asia (Desjardins, 2016). Equity capital for qualified
companies is available and cheaper in offshore locations.

MBA 6601, International Business 5

UNIT x STUDY GUIDE
Title

Taxation of Foreign-Source Income

As complex as domestic taxation seems, it is child’s play when compared to international taxation. Taxation
affects the operating decisions of the multinational corporation. It goes without saying that tax planning
influences profitability and cash flow. Taxation has a strong impact on several choices:

 location of operations;

 choice of operating form, such as export or import, licensing agreement, or foreign direct investment;

 legal form, such as branch or subsidiary;

 amount of debt versus equity; and

 method of setting transfer prices.

There are many reasons why companies set up operations abroad: to be closer to customers or to get access
to raw materials or even technology. Nevertheless, another reason is to escape the high corporate taxes in
the U.S. and other high-tax countries. Recent corporate tax rates in the United States are in the 30% plus
marginal tax rate. Compare that to 12.5% marginal tax rate in Ireland, and you will understand why a
multitude of multinational companies are holding an estimated $21 trillion U.S. dollars offshore (Krieger,
2015).

References

Bank for International Settlements. (2013). Triennial central bank survey. Retrieved from

http://www.bis.org/publ/rpfx13fx

Daniels, J., Radebaugh, L., & Sullivan, D. (2015). International business: Environments & operations (15th

ed.). Upper Saddle River, NJ: Pearson.

Desjardins, J. (2016). All of the world’s stock exchanges by size. Retrieved from

http://money.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/

International Monetary Fund. (2014). Annual report on exchange arrangements and exchange restrictions.

Retrieved from https://www.imf.org/external/pubs/nft/2014/areaers/ar2014

Krieger, M. (2015). Introducing “trickle-out oligarch economics” – How over $21 trillion in wealth fled offshore.

Retrieved from http://www.zerohedge.com/news/2015-07-27/introducing-trickle-out-oligarch-
economics-%E2%80%93-how-over-21-trillion-wealth-fled-offsho

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ra

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er

.c
o

brIc

A
lmost exactly six years ago, the International
O l y m p i c C o m m i t t e e a w a r d e d R i o d e
Janeiro the “privilege” of hosting the 2016

Olympics, and frankly, who could blame them?
The Brazilian economy was surging on the back of a
commodities boom, driving Brazil’s currency—the real—
to its highest level in a decade. Indeed, the country cited
its strong economy and political stability as major selling
points in its Olympic bid. Now, the situation has com-
pletely reversed: Brazil’s economy is in shambles, hit by
the brutal combination of a slowing Chinese economy,
falling commodity prices and political instability.

Not surprisingly, many of Brazil’s economic issues
stem from a slowdown in China, its biggest trading part-
ner. Brazil’s (over)reliance on exporting raw materials
to the seemingly insatiable Chinese economic dragon
contributed to the country’s rapid growth throughout
the early 2000s. As China’s economy has downshift-
ed, Brazil has fallen into a deep recession, with GDP
contracting by 6% during the last five quarters alone.

Beyond trade, China’s slowing economy has also had
a negative impact on commodity prices. Key Brazilian
exports including iron ore, crude oil and agricultural
staples, have all fallen by 50%-60% in the last few
years, driving down Brazil’s terms of trade and leading
to a persistent current account deficit.

On the political front, President Dilma Rousseff’s
approval ratings have fallen into the single digits and
a majority of citizens now support her impeachment.
Rousseff and her party have also been accused of a
massive corruption scandal related to the semi-public
energy company Petrobas, where Rousseff

previously

served as Chair. In early September, Standard & Poor’s
downgraded Brazil’s foreign currency debt to junk,
citing political turmoil as one of the major catalysts.

Some international observers are hopeful that S&P’s
downgrade will serve as a wake-up call to help Brazil
get its fiscal house in order. In an effort to restore inves-
tors’ confidence, the government recently introduced a
$17 billion (66.12 billon real) austerity package for
2016, composed of a mix of tax hikes and spending cuts.

However, the falling currency has driven inflation high-
er, putting Brazil’s central bank in a bind. It would like
to raise interest rates to support the real and counteract
growing price pressures, but tightening on both the mon-
etary and fiscal fronts could push the economy into an
even deeper recession. If the government’s optimistic fore-

casts play out, the country could return to a budget sur-
plus next year and avoid further downgrades. Regardless
of how the austerity package goes over, Brazil’s economy
will remain fragile as long as China continues to struggle
and commodity prices remain subdued.

All of these economic concerns have taken a mas-
sive toll on Brazilian assets. The market

cap of Brazil’s

Bovespa stock exchange, which was previously the
largest in Latin America, has now fallen

below that of

Mexico, and the carnage in the Brazilian real has been
even more severe (see “Real problem”). The real recently
hit an all-time low against the U.S. dollar. In fact, the
value of the USD/BRL has nearly halved in the last year
alone. Brazil’s central bank governor has vowed to use
“all instruments” at his disposal to stabilize the currency,
but it remains to be seen whether that will be sufficient.

The real’s travails could have implications beyond
Brazil. As of this writing, the real has become an indicator
for emerging market sentiment, meaning that a continued
collapse could spill over and cause contagion with other
emerging market currencies and stock markets.

The outlook for the real (and many emerging market
currencies) will hinge on U.S. monetary policy. If the Fed
opts to raise interest rates later this year, capital could
flee emerging markets for the safety of the U.S. dollar.
If the Fed embarks on a prolonged rate hike cycle, the
impact on the real could be even more severe.

Matt Weller (p 78)

the real forex problem

Real pRoblem
The Brazilian real has plummeted vs. the dollar for several years,
and weakness accelerated in July with China’s stock market woes.

Source: eSignal

0.65

0.6

0.55

0.5

0.45

0.4

0.35

0.3

0.250.2593

2011 Apr Jul Oct 2012 Apr Jul Oct 2013 Apr Jul Oct 2014 Apr Jul Oct 2015 Apr Jul Oct

Brazilian real vs. USD

The market

cap of Brazil’s

Bovespa

stock

exchange,

which was

previously

the largest

in Latin

America, has

now fallen

below that of

Mexico.

MT_BRIC_December.indd 53 10/16/15 12:24 PM

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ToplineSTATS
OF
THE
MONTH

18.1%
Percent of
consumers
expecting an
income increase

-0.1%
Retail sales dip in
December 2015

-0.2%
Fall in producer
price index,
December 2015

5.8%
Rise in S&P/Case-
Shiller Home Price
Index, November
2015

-8.15%
Year-to-date
performance of S&P
500, as of January 27

Although currency vola-
tility jumped onto the list of
their most worrisome risks
last year, many treasury and
finance professionals are
only just starting to put to-
gether plans to hedge those
exposures, according to the
Association for Financial
Professionals’ annual risk
survey released in January.

Ranking fourth behind

political and regulatory
uncertainty, tougher com-
petition, and customer re-
tention, currency volatil-
ity appeared in the top five
risk factors for the first time
in the past four AFP risk
surveys (see chart below).
Thirty percent of the 335
corporate finance practitio-
ners responding to the as-
sociation for the 2016 study

rated currency worries as
the top risk factor, compared
with 16% in the prior year’s
survey.

Given the rapid rise of
the U.S. dollar over the past
20 months, along with the
equally rapid fall of the euro,
ruble, and other currencies,
it’s not surprising that cur-
rency volatility has also ris-
en high on treasurers’ worry
lists. Still, the survey’s find-
ing that only 50% of the
finance pros’ companies
had plans in place to miti-
gate interest rate, currency,
and commodity risks is “not
good,” says Craig Martin,
executive director of the
AFP Treasurers Council.

Martin notes that while
larger companies have
greater financial ability to
hedge currency risk with
options, futures, and the
like, only 60% of compa-
nies with annual revenues
of more than $1 billion had
hedging plans in place. Still,
he says it is a promising sign
that 27% of larger compa-
nies with no hedging pro-
gram in place said they will

▼

RISK MANAGEMENT

Treasurers Fret Over
Currency Risks
But only half of companies surveyed have taken measures
to mitigate forex exposure, says a new study.

CONFLICTING
SIGNALS

Sources: The Conference
Board, U.S. Commerce
Department, Department of
Labor, S&P/Case-Shiller

10 CFO February 2016 | cfo.com

Top 10 Risks
Risk factors that will have the greatest impact on
earnings in the next three years

Source: 2016 AFP Risk Survey

Political/regulatory uncertainty 43%

Tougher competition 42%

Customer satisfaction/retention 40%

Currency volatility 30%

Product innovation 26%

Interest rates 23%

GDP growth 22%

Energy price volatility 21%

Country risk/geopolitical challenges 20%

Liquidity 19%

Risk factor
% of

respondents

Thinkstock

“implement a plan to deal with these
risks in the next 6–12 months,” accord-
ing to the study.

Widespread Uncertainty
But currency movements are only
one factor in an economic environ-
ment that seems more and more un-
predictable. Overall, fears about the
global economy have spawned wide-
spread uncertainty about future earn-
ings among the CFOs, treasurers, and
controllers at public and private com-
panies who responded to the survey,
which was conducted in October 2015.
Fifty-two percent of the respondents
believe their companies are exposed to
greater earnings uncertainty than they
were three years ago, while another
37% said the level of uncertainty is un-
changed.

The 52% share of finance profes-

sionals reporting increased earnings
risk is much bigger than the 43% found
in the previous survey, but is much
smaller than the 59% reported in 2013.

The biggest interest rate, currency,
and commodity anxieties for finance
executives are the increased cost of
financing (cited by 61%) and currency
translation risk (53%), according to the
2016 study.

Finance professionals from smaller
companies (those with annual revenues
less than $1 billion) and privately held
ones seem more worried about the in-
creased cost of financing and currency
translation risks than are their peers at
bigger or publicly owned companies,
according to the study’s authors. “One
reason for this is that smaller firms are
less likely to have an active hedge pro-
gram and therefore are more exposed
to those risks,” they write.

To be sure, the framers of the cur-
rent study decided to focus on “specifi-
cally how companies are addressing
interest rate, currency, and commod-
ity risks.” Thus, the high rating finance
professionals gave currency volatility
was perhaps to be expected.

By contrast, the focus of last year’s
study—cyber risk—has seemingly
dropped off finance professionals’ ra-
dar in recent months, according to the
AFP. Only 7% of respondents ranked
cyber risk as a key concern in the 2016
survey, compared with 19% in the pre-
vious survey.

“This shift in sentiment may likely
be due to a growing recognition that
cyber risk is now a core business risk
requiring active management rather
than a rejection of any actual improve-
ment in the cyber risk environment,”
the study’s authors write. ◗ DAVID M. KATZ

The proportion of downgrades to total
rating actions reached 69% last year, the
highest level since the financial crisis in
2009, but the outlook for global credit mar-
kets remains strong, according to Standard
& Poor’s.

In a report released last month, the rat-
ing agency said it downgraded 892 cor-
porate issuers (accounting for about $6.9
trillion in rated debt) and upgraded 394 is-
suers (accounting for about $2.7 trillion) in
2015. Downgrades also were at the highest
level since 2009.

The United States, with its large sample size of rated
issuers, led downgrades in 2015, followed by Europe
and emerging markets.

“The emerging markets continue to deteriorate, with
increased geopolitical risk, slow economic growth, and
financial volatility all contributing to a rapid decline in
credit quality and substantive increase in downgrade
propensity,” S&P said, citing Russia, Saudi Arabia, South
Africa, Argentina, and Brazil as particular trouble spots.

But elsewhere, the United States, Europe, and other
developed markets are continuing to show below-aver-
age negative bias (a measure of downgrade potential).

The negative bias, globally and in the U.S.,
has been slowly rising off historical lows
for about two years, indicating a trend of
steady credit deterioration, but not quite
breaching historical averages, S&P noted.

“We remain guarded in our view that,
while we expect further deterioration in
global credit markets, we do not see a
particularly disruptive or abrupt accelera-
tion, despite a backdrop of financial and
market volatility in recent weeks,” the re-
port said.

“This view is grounded in our belief that
the U.S. economy remains strong and continues to show
resilience (as with the recent employment figures) and
the European economy continues to gain momentum
vis-à-vis its strong business and consumer confidence,”
it added.

While China’s economic slowdown prompted the
International Monetary Fund in January to reduce its
global growth forecast for this year to 3.4%, S&P said its
impact “has heretofore been more pronounced with re-
spect to market volatility than a rapid, lower revision of
our ratings on global corporate (financial and nonfinan-
cial) issuers.” ◗ MATTHEW HELLER

CAPITAL MARKETS

Debt Downgrades at Highest Level Since 2009

▼

11cfo.com | February 2016 | CFO

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MBA 6601, International Business

Unit IV Assignment

Complete Part1 and Part 2 of this assignment, and submit as a single document for grading.

Part 1:

Your company is deciding to expand to the following countries, and you and two other managers will have to visit these countries to set up operations. You have

1,500.00 to convert in each currency. Compute the exchange amount for each, and complete the table.

Country/Currency	USD value for 1 unit of another currency (as of 2/17/16)	Exchange amount
Japanese yen	$0.008754	Ұ
Euro	$1.1159	€
British pound	$1.4398	£

Japanese yen

Euro

British pound

Computer Ұ167,000.00			$
Desks & chairs €1,125.00
Printer £575.00

Part 2:

How much krona does he have to work with?

Answer:

Country/Currency

USD $ value for 1 unit of another currency (as of 2/17/16)	Euro € value for 1 unit of another currency (as of 2/18)
Costa Rica colon CRC	$0.001909	€0.001745
Iceland krona ISK	$0.00788	€0.007062

How much colon does he have to work with? List your steps and the results you achieved with each step. Also, explain some factors that could cause the country’s currency to weaken.

Answer:

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