MNC AND STOCK

GROUP 10 MNC PROJECT

OCEANFOOD LTD AND FACEBOOK STOCK

INTRDOUCTION

1. Overview of the Corporation.

Overview of the MNC (Oceanfood Sales Ltd)

Overview

OCEANFOOD SALES LTD is a Canadian owned seafood production and distribution enterprise founded by John Graham in 1970. The company was born out of the vision of John Graham to provide quality and healthy seafood products for Canadians and promote responsible environmental and aquaculture practices. Before establishing Oceanfood Sales, John had worked in the seafood industry in British Columbia for many years. Having gained rich experience in the industry, he developed the vision to close the seafood distribution gap and promote food and environmental safety in Canada through the establishment of Oceanfood Sales Ltd. (Oceanfood Sales Ltd., 2021).

Oceanfood Sales Ltd. provides premium seafood products to retailers, restaurants, and food manufacturers (Forge & Smith, 2019). Over the years, OCEANFOOD SALES has served its customers through internal production and importation of seafood products for wide distribution (Oceanfood Sales Ltd., 2021). The company delivers seafood such as squid, Basa, prawns, shrimps, crab, bacon-wrapped scallops, wild salmon fillets, steelhead salmon loins, smoked salmon, lingcod fillets, and caviar (Oceanfood Sales Ltd., 2021).

At Oceanfood Sales, top quality, healthy living, and sustainability are their watchwords. Oceanfood Sales operates a contemporary mode of business operation through high tech production and distribution machinery. The company obtains a high-level standard practice to maintain food and environmental safety. Through collaboration with highly proficient producers and distributors worldwide, the company has been able to sustain its responsible fishing and aquaculture practices (Oceanfood Sales Ltd., 2021).

Oceanfood Sales has its headquarter in Vancouver and three other distribution offices across Canada, including Toronto, Edmonton, Montreal. Through e-commerce and local logistics, these distribution offices serve customers in various cities and provinces across Canada.

The company has grown dramatically in size over the previous 50 years, now employing over 100 individuals (Oceanfood Sales Ltd., 2021).

Team

The company's team consist of high-level professionals and industry experts who work collaboratively to uphold the company's standard and drive the mission forward. The top leadership level comprises of the following members:

· Robert Graham – Chief Operating Officer, President

· Louise Graham – Chief Financial Officer

· Ted Kim – Vice President

At the managerial level, the team consists of the following:

· Katherine Cortes-Oviedo - Customer Service Coordinator

· Andrew Damianos - Customer Service | Alberta & Prairies

· Daniela Mendizabal -Logistics and Inventory Coordinator

· Reid Boerma - Logistics and Inventory Coordinator

· Jordan Falbo - Key Account Representative | British Columbia

· Susan Chow - Administrative Manager

· Joanna Cruciate - Marketing Operations Manager

· Claude Doiron - National Sales Director

· Hassan Al Attrache - National Retail Sales Manager

· David Spring - Key Account Manager | Foodservice Ontario

· Matthieu Fournier - Key Account Manager | Foodservice Québec

· Claude Lavoie - Customer Service (Central Canada).

Market Strength / Competitive Advantage

The company operates a contemporary business model, enabling it to remain afloat amidst the rising competition in the food industry. Sustainability as a business principle is the central guide of the company, which puts it forward as a leader in the seafood industry (Oceanfood Sales Ltd., 2021).

The company has been able to stand out in the market and improve sales throughout the years by utilizing new-age marketing and operating techniques such as digital marketing, eCommerce, and a real-time logistics strategy (Forge & Smith, 2019).

The company has a vast target market as it serves a range of customers, including; retailers, restaurants, and food manufacturers. This market range has seen the growth and development of the company over the years (Forge & Smith, 2019).

Furthermore, the company has built a positive image among its primary and secondary stakeholders through the show of and adherence to sustainable business practices. The company is known for its high consideration of the people and the planet in its business activities (Oceanfood Sales Ltd., 2021).

Expansion Opportunities

Over the past 50 years, Oceanfood Sales Ltd has become a household name in the seafood industry in Canada through its standard business practice. However big an organization is, there is always an opportunity for expansion. To increase revenue and market share of Oceanfood Sales Ltd, the company seeks to expand through penetrating other viable markets. 

US Market

The United States is considered a vast consumer market with 329.5 million (United States Census Bureau, 2021).  According to Fiorillo (2021), the consumption of seafood by Americans has increased immensely in recent years. The National Fisheries Institute (n.d.) reported that American consumers ate 19.2 pounds of seafood per capita in 2019, the highest record over the previous decade and projected to grow over the years. This consumption rate is the highest in North America and holds immense future market potential (National Fisheries Institute, n.d.). 

According to the National Fisheries Institute (n.d.), Americans consume a greater variety of seafood than fish. Top 10 of the types consumed by Americans in the order of consumption rate include:

1. Shrimp

2. Salmon

3. Canned Tuna

4. Tilapia

5. Alaska Pollock

6. Pangasius

7. Cod

8. Catfish

9. Crab

10. Clams

(National Fisheries Institute, n.d.).

Given the preceding, Oceanfood Sales Ltd seeks to tap into the United States' market opportunity. However, it is the most viable expansion and market penetration option for the enterprise due to the nearness of the U.S. to Canada, which is the company's home country. The United States is a massive market with increasing demand for seafood products. Furthermore, products such as Shrimp, Salmon, Canned Tuna, Tilapia, Alaska Pollock, Pangasius, Cod, Catfish, Crab and Clams could be focused on as they are the most demanded Americans.

2. MNC Financing.

The total Financing for MNC to penetrate new markets to expand market share is $100,000. This will be sufficient for purchasing raw materials, conversion into final products, marketing, penetration into new markets, and hiring sales staff in the new markets.

To attain this, we looked at the critical needs and budget and the final products' returns. Marketing into existing and new markets will use a budget of $20,000, and penetration into new markets, including payment of licences, transportation of products, setting up of sale shops, and recruiting salespeople, will be allocated a budget of $40,000.

Options Available for Financing include Debt Financing: This will require us to approach a financial institution to give us a loan that we can pay over an agreed duration of time. Equity financing: This will need us to look for investors who can invest in the business and own a percentage of the company. Capital: This will entail a combination of equity and debt financing, giving the lender an option to make unpaid debt into company ownership.

Off-balance sheet financing: This will entail keeping large debts off the company's balance sheet; for instance, if a company requires expensive equipment, they could lease other than buying it. Donor funding: The business can also look to local and international well-wishers willing to finance the company out of goodwill. One may also look to family and friends ready to fund the business as they may do so on favourable terms.

We would mainly seek local Financing, especially when it comes to Debt Financing. This is because foreign banks may require much complex information compared to private banks. Unlike the local banks, the foreign banks are not likely to decentralize their decision making on loans and management of risk. The foreign banks may also use different techniques for lending, and organizational structure, thus could make it more hectic for the business to acquire funding (Shen, 2021). The pricing of loans may also be relatively higher in foreign banks than local banks. The political, legal and environmental conditions in a foreign country might not be conducive. For instance, stringent legal requirements, a hostile political environment, and an unconducive business environment may hinder borrowing from foreign banks.

The best option for me as the CFO would be Debt financing: This is because: the lending institution has no control over the business's operations and has no control over the business; once the loan is repaid, the company has no ties with the lender; the debt financing interest paid is tax-deductible as a business expense; the monthly payment obligation is well-known and can be reliably modelled; debt is also less expensive than equity; debt financing is easier to access with no long-term commitments; debt financing is also more affordable than equity; debt financing is easier to access with no long- (Zhang, 2019).

3. Entering a new market comes with risk.

Financial Risks of the United States

The financial risks associated with the United States as the host country include fluctuation of foreign exchange values which may increase or decrease. For instance, if the United States currency depreciates, the exporters’ competitive strength also reduces (Huang et al., 2015). Currency exchange rates primarily vary due to change in economic factors in the country, which will affect multinational companies exporting goods into America. In addition, change in tariffs and import duties, more so when increased, highly influence the Oceanfood sales company as they are new investors in the United States entering the market. Change in transport charges which constitute directly to the invoice value of the goods affecting the competition edge of Oceanfood Sales limited who will have to increase the price of their products.

The Economic and Political Risks of the United States

The economic risks that impact Oceanfood Sales Ltd, especially in the United States, include fluctuations in the exchange rates, political instability, and shift in government policies and regulations. For that reason, these risks negatively impact multinational organizations resulting in increased difficulties in predicting the market trends, consumer needs, and productivity rates. The political hazards affecting the success of multinational corporations such as Oceanfood Sales Ltd in America include regulatory and legal constraints (Helhel, 2015). Political instability, environmental laws, local labour laws, and currency regulations also impact corporate profits and goals. Additionally, they include political decisions that encourage confiscation, expropriation, and nationalization, which affect organizations' ability to access new markets and customers within the United States. There are increased government interruptions in the business.

Foreign Exchange Exposures

Foreign exchange exposures mainly exist when the multinational companies' cash flow value is highly dependent on foreign currencies. Additionally, foreign exchange divides into transaction exposure which deals primarily with the actual sale of foreign currencies occurring among the companies (Menkhoff et al., 2016). Monetary transactions are mainly to profits as the results of multinational organizations. On the other hand, the objective of making money through foreign currency transactions may be inhibited by the market's downward trajectory. Furthermore, translation exposure often involves translating accounting books to home currency and reporting them to shareholders. The restated statements demonstrate the organization's specific date and home currency (Helhel, 2015). Economic exposure openly impacts the value of the multinational company as the rate is influenced by foreign exchange. Conversely, the value of a company is the function of assets it possesses and the operating cash flows.

The Foreign Exchange Exposure that Applies to Oceanfood Sales Ltd

Transactional exposure applies to Oceanfood Sales Ltd because of the business's uncertainties involved in international trade face. For that reason, transactional exposure facilitates increased risks on Oceanfood Sales Ltd.'s equities, liabilities, assets, and Income, significantly as all these factors change in value resulting in changes in the exchange rates. Additionally, it includes risks associated with fluctuating currency exchange rates, especially after multinational organizations have already undertaken a financial obligation in the market (Huang et al., 2015). Hence, the multinational corporation needs to adopt and develop a hedging strategy to ensure that all currency swaps purchased are adequately locking in a currency exchange rate, especially for a given period.

The Change in Home Currency in the Last Three Months and its Impact on Oceanfood Sales Ltd

The Canadian currency has changed in the last three months, thus impacting large multinational companies in the country, including Oceanfood Sales Ltd. The Canadian dollar has been dropping where it pulled back 3.2 % touching its most substantial level since 2015. The currency has been dramatically affected by the surprise of the Federal Reserve pressure and the Covid-19 that slows the global economic recovery. The decrease of the Canadian dollar has significantly impacted Oceanfood Sales Ltd. It has facilitated an increase in foreign inflation rates that reduce the domestic customers’ purchasing power, especially when compared to other foreign currencies (Wu et al., 2021). Additionally, the dollar depreciation has led to a decline in the Canadian export’s prices, mainly in the export destinations, which increases imports prices, especially the food products.

Conclusion

International multinational companies involve firms that focus on international business. Managers focus on maximizing their organizations' value while ensuring effective identification of new markets that increase market share and enable the company to invest excess cash. Similarly, Oceanfood Sales Ltd works hard and consistently to ensure that the produced and imported goods are customers' best selection and maintain quality and sustainability. The change of the home currency, especially in the last three months, has impacted the Oceanfood Sales Ltd business requiring strategies to sustain business operations and mitigate the impacts of foreign exchange exposure.

4. The CFO has witnessed a steady rise in the stock market and believes this is an ideal time to invest (you have been given a stock to monitor)

Stock name- facebook inc.

      

From 2016 through 2020, the sales/revenue value has always risen based on the previous five years' performance. The value increases from 27,638 million dollars to 85,965 million dollars. However, the sales growth percentage has decreased from the last five years. The value has reduced from 26.61% to 21.60% over the previous two years. Over the last two years, gross Income has increased from 57,927M $ to 69,273M $ from 2019 to 2020. while considering the percentage growth is 24.62% to 19.59% and the gross profit margin accounted for in 2020 is 80.58%. Stats are speaking company has got promising future in both considering the expansion and the financial growth. (Menlo, 2021) DAUs (daily active users) on Facebook increased by 11% year over year to 1.84 billion in the last month of 2020. Facebook monthly active users (MAUs) – MAUs by December 31, 2020, were 2.80 billion, a growth of 12% year-over-year. Capital expenditures – Capital expenditures, involving principal payments on finance leases, were $4.82 billion for the fourth quarter and $15.72 billion for the entire year of 2020. Cash and cash alternative and marketable securities were $61.95 billion as of December 31, 2020. (Ycharts, 2021) Facebooks debt to equity ratio, on average, has been 0 for the past two years. In the fourth quarter of 2020, Facebook net income increased by 43 per cent from the previous quarter, reaching the record-high amount for the evaluated period of 11.2 billion U.S. dollars. Facebook's most recent annual net Income amounted to 29.14 billion U.S. dollars.

  

Title	2019	2020
Total revenue ($)	70.7B	85.97B
Gross Profit ($)	57.93B	69.27B
Operating Income ($)	28.99B	32.67B
Net Income ($)	18.48B	29.15B

 

        The last two years performance justification and reason behind the surge in share price. In 2020, the introduction of COVID-19 shook the world economy to a cease. With everybody forced to be at home in COVID-19 lockdowns, most people spent much time online connecting. And as the primary source of social media platforms, Facebook was in the correct spot at the pinpoint time.

     

(Lawrence, 2021) Facebook concluded 2020 with $86 billion in revenue, up 22% year over year. Net Profit mounted 58% to $29 billion. Based on the previous year's momentum, Facebook also reported a 48% rise in revenue in their 1st quarter of 2021. Net Profit jumped 94%, breaking Wall Street's expectations. Most of the prior overperformance was ascribed to a 30% year-over-year improvement in the average price per ad and a 12% increase in ads distributed.

     

For most of 2020, Facebook has been trading at just about ten times its sales. Facebook that although after improving 45% over the last one year -- traded at lower than a 3rd of that multiple.

As the wave turned on lofty-risk, lofty-reward ratios, investors had built up more confidence betting on Facebook or even adding more to their portfolio. This elucidates why Facebook continued to move ahead while a maximum of the major tech company stocks have dwindled in the past few months.

Gordon growth method to find the intrinsic value of the share.

        The company is not paying any dividend, so for using and formulating the value of the stock through the Gordon growth model, we cannot do so without taking dividend as a parameter based on the formula. And as the company is not paying dividends, we cannot find the stock's intrinsic value based on the Gordon growth model.

Gordon growth formula:

P= D1 / r−g

where:

P=Current stock price

g=Constant growth rate expected for dividends, in perpetuity = 0

r=Constant costs of equity capital for the company (or rate of return)

D1 =Value of next year's dividends = 0 (As the company is not paying dividends)

Required Rate of Return (r)

Assumptions

Rate of return on L.T. Treasury Composite1 RF 2.03%

Expected rate of return on market portfolio2 E(R.M.) 11.66%

Systematic risk of Facebook Inc.'s common stock βFB 1.25

The required rate of return on Facebook Inc.'s standard stock r FB 14.11%

The conclusion and advice on whether or not to invest in Facebook stock, according to my research, is not the best moment to start a new investment or purchase this stock. (Rachel, 2021) There seems to be a lot of development on Facebook over the last month.

The global outage resulted in a sharp drop in the price of Facebook shares, which fell below the 50-day moving average's support and moved closer to the 200-day moving average, which may provide significant support. We can see the trend reversal from that point but the other factor to see before investing is the case with the FTC and Facebook growling with legal matters. (Brain, 2021) Facebook recently had a whistleblower that led Facebook to very volatile positions. Whistleblower Haugen resigned from the company this year after copying 1000s of pages of written documents that briefed a Wall Street Journal series, Facebook Files. With the Securities and Exchange Commission, she filed a complaint asserting that Facebook management deceived investors regarding its practices by the shortcoming to admit what its research said.

     (Rachel, 2021) Members of Congress summoned for a probe of Facebook after the WSJ reported that Instagram's research shows that the site had a pessimistic effect on the self-image of young girls. The problem: Facebook did not share those Instagram findings in a submission to lawmakers in August on that very topic.

Other than Facebook, which additional company share should the firm invest in. I would recommend the board purchase the stocks of Netflix inc as in the account of the company's plans.

(Patrick, 2021) Netflix recently indicated that it would no longer issue billions of dollars in extra high-yield debt to fund its content spending sprees, which is an essential step in its long-term financial strategy. By 2022, the company plans to be cash-flow positive permanently.

They intend to reduce the debt to between $10 billion and $15 billion; the company currently has $8.2 billion in cash and wants to repay a tranche of bonds due on February 1 using Money on hand.

Even better, it intends to begin returning funds to shareholders through share repurchases (as if a $600 share price wasn't enough). So for the long term, they will get enough debt-free cash flow, and revenue will improve in future.

Also, the company stated that Netflix is trading at a price-to-earnings ratio near its lowest in the last decade.

5. Discuss the financial crisis of 2007-2009 in the USA and compare it with the Great Depression in 1929 (B); what triggered both crises? (The Great Depression and the financial crisis 2007-2009)

The Great Depression was the most terrible economic crash, which affected the entire industrialized world. On October 29, 1929, the stock market fall set in motion a series of events that would eventually lead to the Great Depression. However, the world and American economy had been in disarray for six months before Black Tuesday.

The Great Depression was brought about by a combination of highly uneven income distribution throughout the 1920s and extensive stock market speculation in the second half of the decade. The Great Depression was caused by a blend of the profoundly unequal allocation of wealth right through the 1920s and the widespread stock market speculation during the latter part of the decade. The inequality in wealth distribution in the 1920s did subsist on many levels. In the United States and Europe, Money was divided unequally among the middle class, the wealthy, and the agricultural and industrial sectors. This disparity of wealth generated an unbalanced economy. The extreme speculation in the stock market in the late 1920s made the market artificially high, which ultimately led to a massive market crash. This market meltdown, along with uneven income distribution, threw America's economy into disarray. (Szostak, 1996)

Several economists deem the 2007–2008 global financial crisis an appalling financial crisis since the 1930s Great Depression. It affected the fall of big financial organizations, the banks' bailout by national governments and stock markets recessions worldwide. Many firms rely on a short period credit market to finance products. On the other hand, in 2008, when several esteemed institutions announced insolvency, the media extended the news speedily, effecting an abrupt decrease in investors' confidence and lesser flow of capital. Investors' sensitivity to distress and panic affected a sharp decline in liquidity, which many firms profoundly relied on. The breakdown of one firm counterbalances the contagion risk and leads to several other firms' failures. Additional grounds of the crisis are the class of financial securities and assessments. Credit-rating companies, investors and issuers were all excessively optimistic regarding investments. Many firms held shields enclosing highly positively connected risks and not succeeded in branching out their portfolio to reduce risk. As a result, their operations ran on extremely hazardous investments that credit-rating companies wrongly evaluated. Consequently, these lethal financial assets are the most critical cause of the collapse of several firms. (Szostak, 1996)

What prevented the financial crisis of 2007 and 2009 from becoming a depression? Explain in detail and include President Obama’s involvement

Many factors led the world to a significant recession period. But the innovative ideas and resources applied to counteract the failing economy led to the depression caused in the earlier recession period (1929). President Barack Obama implemented the Dodd-Frank Act in 2010. It handed the government command of crashing financial institutions and created consumer protections to counter predacious lending and spread government regulatory power over the financial sector. Obama's government introduced stimulus packages and introduced new financial regulations into the system.

As soon as Obama's government came into power, they took three critical steps to stabilize the economy. They ordered the 19 largest national banks to go through the stress tests on the capacity to withstand further financial degradation by establishing The Supervisory Capital Assessment Program (SCAP) and the Capital Assistance Program (CAP). The government organized Home Affordable Modification Program (HAMP) to assist in revising the mortgages of around four million families and implementing a vast stimulus program. After these steps, Obama's financial advisors started to apply the Keynesian theory; with $787 billion in funds, the approach led to the government being aggressive on spending, encouraging quantitate demand. It will work as a stimulator of the economy. The American Recovery and Reinvestment Act (ARRA) was passed in 2009 to preserve and create jobs and assist those hardest hit by the recession by providing funding for transportation, technology, and health care and maintaining state and local government budgets. The stimulus bill provided aid for local and state government employees and took command to revive job growth after severe job losses throughout the recession. Volcker rule was introduced to ensure that banks do not work with hedge funds and take huge risks.

In the following manner, Obama and its government recovered from the economic disaster of 2007- 2009 and prevented the recession from converting to the great depression.

Please explain how the crisis of 1929 impacted Germany and how it changed the relationship with the USA.

The Impact of the 1929 Crisis on Germany

The Wall Street crash on the U.S. stock exchange in 1929 brought about a global economic depression that lasted throughout the early and mid-1930s. This same event inflicted a severe financial crisis upon most developed nations worldwide (Nazi Germany, 2020). According to BBC (n.d.), the great depression, as it is being called, was particularly severe in Germany due to its economic ties with and financial dependence on America. Before the 1929 economic crisis, it is said that Germany was hugely dependent on American loans to finance businesses and, more so, enjoyed from the gains of the artificial prosperity of the U.S. stock market. At the time of the crisis, American banks called in for their foreign loans at concise notice, which took a toll on German businesses and the economy at large (BBC, n.d.).

Effect on Industry

The 1929 economic crisis brought about massive disruption in trade activities in Germany. Demand for German products started to experience a drastic decline, and on the other hand, capital and credit became difficult to obtain. The United States, being the most significant purchase of German industrial products, established tariff barriers policies to protect its own companies. Therefore, these said factors resulted in a sharp downturn in sales of German products, thereby rendering German industries and factories unprofitable. In effect, many factories got downsized, and others had no option but to close (Nazi Germany, 2020).

Mass Unemployment

The closedown of factories and industries consequently resulted in mass unemployment in Germany. Around 1.5 million Germans lost their work by the end of 1929, and by early 1933, the figure had more than doubled, with approximately 6 million individuals losing their jobs (Nazi Germany, 2020). This brought about economic hardships and difficulty among the citizens of Germany at the time.

Government failures

The Weimar government obtained a very harsh management style by increasing taxes rather than stimulating welfare and spending. This, however, led to increased hardship and unfavourable economic situations among German citizens and residents.

How the crisis changed Germany’s relationship with the USA

At the emergence of the crisis, nations were caught up in compromising situations to reduce losses and speed up recovery. The United States obtained a nationalistic style of managing the problem by calling for their foreign loans at short notice. This very incident had a very terrible effect on the economy of Germany which resulted in a lack of trust and friction in the relationship of both (BBC, n.d.).

Secondly, the United States began to impose tariff barriers on imports to protect local businesses. This also had adverse effects on the economy of Germany and, therefore, resulted in a lack of trust between both nations. To a large extent, the relationship between both countries changed as Germany began to solidify its internal economic and financial independence. After the crisis, Germany became more independent and refrained from its vast reliance on American loans to power its businesses and economy (Nazi Germany, 2020).

Discuss three similarities and three differences the United States experienced during the Great Depression and the financial crisis of 2007-2009 

The Great Depression ensued in 1929-1930. It was caused by the initial drop in the stock market indices and had an enormous and enduring influence on the U.S. and the global economy as it sustained for nearly a decade. On the other hand, the financial crisis happened in 2007-2009 and was caused by the eruption of the U.S. housing bubble owing to the subprime mortgage crisis. The price level fell by 22%, and real GDP fell by 31% during the Great Depression, which lasted from 1929 to 1933. In the recession of 2008-2009, the price level jet at a sluggish speed and real GDP cut down by lesser than 4%. Both fast credit extension and financial revolution crises led to higher leverage. On the other hand, however, the credit boom of the 1920s was mainly specific U.S. -, the boom of 2004-07 was global. (Helleiner, 2011)

In the Great Depression and the 2007-2009 financial crisis, the U.S. economy was the epicentre of economic collapse. This distinguishes these events from the numerous prior financial crises in smaller, traditionally developing countries or additional-variety garden recessions in developed nations.

Given the size and importance of the U.S. economy and financial system, a global impact has always been significant. (Helleiner, 2011)

The recession of 2008-2009 was considerable slighter than the Great Depression for numerous reasons:

· During the Great Depression, bank failures, a 25% reduction in the extent of Money, and indecision by the Fed occasioned a failure of collective demand. Wage rates of Money and the price level were sluggish to regulate, ensuing in vast cuts in real GDP and occupation.

· The Fed In the course of the 2008 financial crisis, bailed out distressed financial establishments and doubled over the monetary basis, which reserved the amount of Money increasing. Collective with improved government spending, the rising amount of Money restricted the reduction in collective demand, resulting in lesser cuts in real GDP and employment. 

Changes to the Basel Accord after the 2007-2009 Financial Crisis

Several changes took place in the Basel Accord following the financial crisis of 2007-2009. Initially, there were Basel I and Basel II before the financial crisis. However, following the financial crisis, Basel III was formed. The economic systems are prone to a lot of leverage and a lack of buffers to liquidity during the crisis. Insufficient administration and mitigation of risks strategies and poorly developed systems for incentives were part of the shortcomings. First, the Basel Committee published the guidelines for higher liquidity credit risk control in response to risk variables. Basel III emphasizes the meaning of capital and the improvement of capital ratios (Benink, 2020). Secondly, in July 2009, the Basel Committee released a fresh batch of materials to strengthen the Basel framework, emphasizing complicated stock holdings, off-balance board entities, and portfolio analysis concerns. Given the shortcomings of the financial crisis, these enhancements were part of a broader plan to reform international bank regulation and supervision.

Basel framework highlights relatively high and improved capital, proper risk insurance, and the initiation of debt to equity ratio as a backup plan to the risk-based necessity. Additionally, considerations to motivate the flow of wealth, which is eroded in moments of stress, and the advent of two international liquidity guidelines are highlighted in the Framework. Third, the Basel Accord through the Basel-III has enhanced the quantity and quality of cash flows or the regulatory capital. For instance, following the Basel Accords, the Central Bank of Pakistan has implemented risk-based capital requirements for Pakistani financial institutions. According to Ashraf et al. (2016), the Central Bank has updated Risk-based capital requirements regularly to reflect revisions to the Basel Accords. The main objective of the capital requirements depending on risk is to limit banks' risk and strengthen banks' capital bases by making capital requirements more adaptive to asset investment risk.

6. As an MNC, you encounter Foreign Exchange Risk -Hedging

(a) Discuss the different options for hedge receivables and payables (as discussed in class) and recommend to your Board the best hedging strategy for the MNC. Be sure to qualify your recommendations.

Three different hedging strategies are used in Foreign exchange: Forward and futures hedge, money market hedge and currency option hedge.

Forward and future hedge - A futures hedge utilizes currency futures and is widely used for smaller transactions. While a forward hedge will use forward contracts to set future exchange rates, forward contracts are generally negotiated for huge transactions. Further regarding the hedging receivables and payable, to hedge future payables and receivables, the company may purchase and sell currency futures, respectively, or work out a forward contract to buy or sell the currency forward. The actual cost of hedging gives the value of expenses incurred without hedging. When the actual hedging cost is negative, hedging is more favourable than not.

Money market hedge requires taking a money market position to cover future payables or receivables.

For payables: home currency is borrowed and optional in this method. After that, convert it to foreign currency on spot rate and then invest in that currency to pay off A.P. at maturity.

For receivables: foreign currency is to be borrowed and converted to home currency on spot rate and then invested at home. Pay off the loan with foreign currency A.R. at the time of maturity.

Currency option hedge utilizes currency call or puts options to hedge transaction exposure. As options are not be exercised, it insulates the firm from terrible exchange rate movements, allowing the company to gain from favourable action at the same time. Currency options hedging is also beneficial for hedging contingent exposure.

I recommend to board the best hedging strategy can be forward and futures hedging. To justify the answer, let's take a firm x that deals with silver and is forecast to purchase 20000 ounces in six months. Let say the current market price for silver is $12/ounce, and the predicted future price from fundamental and technical analysis says that the price will be $11/ounce in six months. Then buying the future contract and hedging the position, the firm can guarantee a cost of $11. This reduces the company's risk as it can close its position and buy 20000 ounces of silver at $11/ounce in six months on the contract's expiry date. Similarly, it can be used for shorting the position and seeing the risk and the reward; the MNC can best use this hedging technique.

(b) As an MNC, when would you use the spot rate, discuss

The spot rate is the price set for spot settlement on an interest rate, commodity, security or currency. The spot rate is also known as spot price and is the current market value of an asset that is available for instant delivery at the moment of price set. The big companies and MNC use the spot rate when the future price is predicted to go with the company's plan. There are a few scenarios where the MNC uses the spot rate to trade. When the company’s top management predicts that the future price is backwards and the future price will rise to meet the higher spot rate at the time of expiry, the company will use the spot rate to trade. Suppose the material or raw commodity is not deteriorating with time, and the company predicts the commodity's future price will increase. In that case, the firm shall purchase the commodity at the spot rate, so they don't have to pay more as the future price rises. Similarly, a company can take a short position at the current spot price if the prediction is that the future spot rate will be lower than the current. The firm will short the position and gain Profit at the expiry of the contract.

(c) If the MNC currency's (host) is weaker, how will it impact your investment (from question 2) and profits.

Many factors will impact a company's investment, and some factors would play out positively while some will be detrimental to the investment. One major factor that would affect the company's investment is the fluctuation of the currency rate compared to the different countries. It would mainly depend on the land that the investment is made. If the MNC has invested in the foreign country, like if a Canadian firm has invested in the USA market and the currency rate of the Canadian dollar starts to get weak and losses the ground against the U.S. dollar, then the Money and resources invested in the U.S. market will gain value compared to the investment done in Canada for the firm. Similarly, suppose the firm has invested an amount in the same country, and the country's currency gets weak. In that case, though the investment is giving a sufficient amount of return, the amount will not be able to buy things that it would buy before the currency gets weaker. So the recovery value would decrease though the firm will get the same return, the amount's worth will decrease. Hence the Profit will be the same in numbers, but as the currency's value has reduced, the gains will not be sufficient compared to expected. For instance, if they buy having a Profit of $5, the company could buy a coke, but due to currency getting weaker, the same $5 will not buy a coke in the current scenario.

(d) Go to www.oanda.com Click on “Currency Tools”, then “Historical Currency Converters”, and “Currency Trends". Explain how the home currency has changed (compared with host currency) over the last three months and how will it impact the MNC's business.

We will be discussing the USD/CAD forex exchange rate over the last three months from September 1 to November 30, 2021. From information gained from the OANDA website, we will be discussing it. For the first week of September, the value of the Canadian dollar improved compared to the U.S. dollar but then after the U.S. dollar made its grip and CAD continually grew week and USD made the highest of 1.281 compared to the CAD. But after reaching the peak, the USD went bearish, and the Canadian dollar raised strong. USD was bearish for the whole month of October, and the lowest value made by the USD compared to CAD was 1.233 on October 20. Following the bearish trend, the USD started to gain and changed the direction at the end of October. As the trend reversed from bearish to bullish, the Canadian dollar lost its value against the USD. The USD gradually grew to a value similar to its trading value in mid-September. It reached near its three-month high value of 1.278 at the end of November. So the currency trend for the Canadian dollar was initially bearish. It turned the table and went to reach its highest value in mid-October. Its value again depreciated, and for further prediction, considering technical analysis, there is strong resistance at 1.233. When USD/CAD crosses this value, the bullish trend may continue.

(e) When the home currency appreciates, is it wrong for everyone? Discuss using examples. (Think about repatriating revenue home or if you borrowed from home (question 2) to fund the MNC).

In most circumstances, an increase in the value of one's local currency positively impacts the economy. However, it may have unique negative consequences for enterprises and multinational corporations operating in the country. For instance, the effect was observed on the products of the company named Mahindra & Mahindra Ltd., where the rise in the price of the Indian Rupee resulted in the cancellation of orders from several African Nations. It was estimated that the company reported a loss of around 22-25% of orders as other countries received better packages from companies in China. In such cases, if the company has borrowed money in the form of loans, it would create an unnecessary loss, and the company would find it challenging to repay the same. Apart from this, it will have to pay more money to the banks to reduce foreign earnings. The loss equation often results in companies closing their offices and functioning in such countries where they might observe a sudden rise in the currencies. Thus, there is an apparent loss for MNC's if they have borrowed money from lenders and banks from the home country. Eventually, it creates a scenario where big companies might start looking for other markets that provide good opportunities for growth and profits.

Conclusion

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