Executive Summary
The probability function is also in the favor of the company, and found that the chance of earning high is effective and powerful as far as the effectiveness of the company are concerned. The company should go forward with the same aspect in order to grow its market substantially and effectively in different regions.
Introduction
Decision making is an important activity for an organization, and it is equally beneficial for the long term sustainability of an entity in a particular industry (Allayannis and Brown, 2005). The value of decision making can be analyzed with the fact that the whole effectiveness of an organization lies on the fact that how comprehensively they are taking decisions. Some of the major decisions that considers by an organization for their effectiveness are expansion decision and sustainability decisions. Thus, multinational companies have to take this decision very seriously. Multinational Corporations (MNCs) usually have their active operations and functions in the countries outside the country of origin, and they usually take decisions that associated with their core expansion and effectiveness (Allayannis, Brown and Klapper, 2001).
One of the major problems MNCs have in their operations is the management of exchange rate in an organized manner (Allayannis, Brown and Klapper, 2001). Exchange rate usually depends upon the prevailing exchange rate and interest rate of the respective country and it is one of the most important types of economic decision making that has been taken into account by many organization of the world. In this assignment, a similar scenario of selling multi nationally along with exchange rate has been used for the analysis. There is an analysis related to USASuperCars have been defined which are strategizing to enter in different locations to sell their luxury cars. The company has just signed a contract of selling the luxury cars to different customers around the globe, by considering the exchange rate accordingly. The assignment comprises on an introduction, a main body of analysis, and a though provoking conclusion that will conclude the entire working in a matter of one or two paragraphs.
Analysis and Findings
According to this scenario, the regions have been divided accordingly, in which the USASuperCars are intending to sell their luxury cars. Japan and Canada have been bifurcated among two different regions categorized as 1 and 2, with different quantity as well as selling price. There are 27 cars are selling in total in different regions. The graph mentioned below is showing that in which country the selling proportion is the highest (Dayananda, 2002).
It can be clearly seen that the selling proportion of selling the luxury cars is the highest in the region of the United Kingdom (UK). One of the major reasons behind the same is the current exchange rate of £/$. Apart from the UK, Japan and Canada also have substantial amount of units selling. Mentioned below graph is showing the proportion of selling cars in all of these regions accordingly
It can be clearly seen from the graph that around 44.44% is the total proportion of the UK, which is the highest, while the proportion of Japan-1 is also high. Japan-2 and Canada-2 has the same proportion of selling cars which is 11.11%, followed by South Africa and Canada-1 with a proportion of 7.4% and 3.70% respectively.
Recognition of revenue is important aspect for an organization; in fact no organization can survive for long without recognizing the revenue in a perfect and organized manner (Homaifar, 2004). A company that can recognize its revenue in an effective would be comparatively more worthwhile as compared to a company which is unable to do the same accordingly. The revenue of each of the country will be needed to examine in the context of the exchange rate of the United States. First of all there is a need to change the selling price from the respective countries to the US$, and then analyze its mean and standard deviation. Mentioned below table is showing the same
The distribution is found in the table, and showing the largest amount of revenue collected for USSuperCars is from UK with a selling price of $ 91,473 per car, and estimated revenue of $1,097,676, followed by South Africa and Japan-1 with estimated revenue recognition of $729,806 and $362,725 respectively. The mean revenue is $ 410,472, while the standard deviation of the revenue is 372,216 that mean that 90% deviation is expected in the revenue of the company, in terms of their mean return. The same can be found in the below mentioned graph
Organizations usually used probability functions to analyze their economic power and prosperity. They usually analyze their revenue recognition capability and efficacy by analyzing the probability accordingly (Homaifar, 2004). The company is generating substantial amount of revenue from their sales, however in terms of generated revenue will exceed the amount of $ 2,200,000 is very strong, as the company is currently generating $ 2,873,304, while the deviation is $372,216. After subtracting the standard deviation from the original amount of revenue, it still is higher than the requested amount of $ 2,200,000. The same case is applied on the scenario when the revenue is expected to exceed from the level of $ 2,225,000. Therefore, it can be said that the probability of generating revenue exceeding the level of $ 2,200,000 and 2,225,000 is 94.84%, which is an effective sign from the viewpoint of the company. It is also showing the power of commitment of the company, as they stand and deliver the best they can, by selling their cars in the respective regions (Homaifar, 2009).
Upper end and lower end are two important scenarios for the companies to analyze the things accordingly (Homaifar, 2009). The upper scenario of recognizing the revenue has been analyzed in the above mentioned paragraph; however it should also be analyzed on the lower case as well. Analyzing the probability that the revenue will be lesser than the level of $ 2,160,000 and $ 2,130,000 should be analyzed in this particular part accordingly. If the same amount of standard deviation is subtracted from the original amount of revenue which is $2,873,304, then it will come as $ 2,501,088, which is way higher than that of the lower case revenues. It means that the probability that this revenue will be lesser than the level of $ 2,160,000 and $ 2,130,000 is 5.16% which is very low, as analyzed after subtracting the standard deviation from the total revenue function.
It is observed from different cases that an intermediary bank will come between the company and their respective operations. The intermediary bank will complete all the transactions in different currencies, and then give a total sum of amount to the company at the end of the day. HSBC, one of the largest banks of the world is taken into account for this analysis which is showing their interest to pay a sure sum of $ 2,150,000 in return for all the revenues in the local currencies. But, the idea will not be supportive for USASuperCars because the company is generating a higher thread of revenue then the amount actually offered by the HSBC. Mentioned below graph is showing a clear difference in the current recognized revenue of USASuperCars and the amount offered by HSBC to them
The graph is showing that there is a difference of around 25% in the actual revenue generation, and the amount offered by the HSBC. This particular should not be accept by USASuperCars because it will not be in the favor of the company, as the company has the ability to have a higher revenue generation capability then actually offered by the HSBC.
Risk is a bitter truth for an organization, and no organization can deny with this fact that risk always creates different problems for them (Kamil, 2012). Riskiness is a factor that found heavily impacted over the financial position of an organization. It is a probability that the chances of occurrence are very low in a particular thing. In the case of USASuperCars, the sales manager is willing to accept the offer initialized by the HSBC, but CEO of the company is not in the favor of accepting the same. It means that the Sales manager of the company is more risk averse, because he is accepting the offer presented by the HSBC, without looking over the actual amount of recognized revenue, while it is totally change in the case of the CEO of the company. CEO of the company is bit risky that is why they are moving towards higher amount of revenue rather than relying on the analysis of the HSBC and their pertinent offer, which will not be in the core favor of the company from any angle.
There are numerous risks that often found during the operations of an organization, and analyzing every risk is essential for their future and future concerns. For multinational corporations, there are numerous risks that will be taken into consideration in order to strengthen their functions and operations in an effective and organized manner. In this case study, there is only one risk highlighted that will affect the earnings of USASuperCars which is exchange rate risk. However, there can be two more risks that will be taken into account. The first risk is the propensity of consumption of the people that might change or swings with the weather. It might happen that the consumers will not buy the products of USASuperCars because of low brand recognition in their respective country. Secondly, there is a threat of any new local or domestic company arises in the region that will attract most of the people of the country towards it. The consumers will always prefer the product of their respective country, because they have an idea that the product has been made with the current economic environment of the country.
The timings of recognizing the revenue is extremely important for the companies, and it is equally beneficial for USASuperCars as well. In this part of the assignment, it is required to analyze the sum of money in the respective time period. If the amount of money offered by HSBC will be due in the next three months rather than 12 months, then it will be more effective and worthwhile for the company, as the company can invest the money and can increase the rate of return higher than the actual revenue generation capability. This particular strategy would be more worthwhile for USASuperCars as they would like to prefer the payment to be made in the period of three months, while the bank would prefer the money to be paid after a period of twelve months. USASuperCars have many options of investment, like treasury bills and notes, even stocks as well wherein the company can have high return by parking this particular investment just for the sake of 6 months of time period.
HSBC which is one of the largest banks of the world has been analyzed and taken into account in this case study. It is found that HSBC would like to have a sum of payment to USASuperCars of $2,150,000 for the local currency (Kamil, 2012). For instance, if the company accepts the offer of HSBC, then what would be the risk on the end of bank? The bank is intending to pay a sum of $2,150,000 to USASuperCars for all of their revenues. If all of the revenue would be converted to the current exchange rate of $, then the recognized revenue amount would be $ 2,873,304, which is comparatively higher than that of the actual amount offered by the bank to the company for their effectiveness. The probability of that the bank will incur a loss is very low, because the difference among the bank sum and revenue recognized amount is extremely high, so there will be no problem for the management of the bank.
There are numerous methods that can be used to analyze the level of riskiness in a company, and all of its respective movements in its share power. Among these methods, there is a name of Value at Risk (VAR) is yet another (Kamil, 2012). VAR is a risk metrics cum tool used to analyze the largest amount of risk associated with a portfolio in a given time period. It usually analyzes that how much a company can loose on its current portfolio in a one day time period. It is an important measure of risk, and requires using here as well (Tas, 2008).
Value at Risk = Total Revenue * Standard Deviation
= -1.64*44668.32 = -731.05$
= 2,192,868 – 2,150,000 = $ 42,868
= $ 731.05$ is the amount which is on risk of the company, and there is a 95% chance that the company can lose this amount of money, however there is a 5% chance that the loss would be higher than this level as well. The pure profit (Non-Risky) is $ 42,868. USASuperCars have to take this thing into consideration for the betterment of the company.
The bank (HSBC) has other options as well to not to change the entire currency to the current dollar value in particular (Moguillansky, Bielschowski and Pini, 2001). Some of the particular options are to induce the company to open an account with them and put all of their money in the US Dollar. The bank can also offer a global ATM card to the company through which the can withdraw the money while having in any part of the world which will certainly increase the chance of economic prosperity of the company because it increases the point of sales of the company with a positive node and with full of effectiveness. USASuperCars can withdraw the funds from all of these four destinations described in the assignment in their local currency, and bank would get the desired amount of revenue on the basis of this global ATM card.
Conclusion
There are two different parts of organizations are there, known as domestic organizations and international organizations. International organizations referred as Multinational Organizations, as they have expanded their operations in multiple destinations. The most dominating type of risk associated with such companies is the exchange rate risk. In this particular assignment, the same risk has been used to analyze accordingly on a given case study of USASuperCars. The case has been decided on the level of exchange rate risk by analyzing the scenario of a company which is intending to sell their cars in different markets of the world. There are four different regions which have been selected for the selling of the car other than the United States. There are number of questions that have been answered with strong tables and charts for the evidence. The entire analysis is revealing that the idea of the company of selling their cars in different parts of the world would certain bring economic prosperity for the company in the near future, and the amount of riskiness would be quite low in particular. This particular aspect is effective from the standpoint of USASuperCars in particular as well as from the viewpoint of HSBC.
Appendix
A- Mean and Distribution
= (Quantity Japan1 * Japan 1 Selling Price) + (Quantity Japan2 * Japan 2 Selling Price) + (Quantity Canada 1 * Canada 1 Selling Price) + (Quantity Canada 2 * Canada 2 Selling Price) + (Quantity South Africa * South Africa Selling Price) + (Quantity UK * UK Selling Price) + (Quantity USA * USA Selling Price) / 7
Q-2) Means with adding US prise selling = 2092868+100,000 = $2,192,8687
- The standard deviation of the uncertain revenue is = $ 44,668.321
It is calculated by 2 ways
Find the variance =(UK Quantity*selling price *Standard deviation)2 +(Japanl Quantity *selling price +Japan2 Quantity *selling price * Standard deviation )2 + (Canada 1 Quantity*selling price+ Canada 2 Quantity*selling price * Standard deviation )2 + (South Africa Quantity*selling price * Standard deviation )2 =1,995,258,98776
2- Find the standard deviation= -"valiance
Q2: a- What is the probability that this revenue will exceed$2,200,000? P(X>2,200,000) = P X-p)/o:
200,000-2,192,868)444668.32197) = 0.1596657247
Z = 0.04404 = 4%
b- What is the probability that this revenue will exceed$2,225,000? P(X>2,225,000) = P (X-p)/a
Q3: a- what is the probability that this revenue will be less than $2,1.50,000?
P (Z<-95969) P (Z>9596,) z= 4. 1
What is the probability that this revenue will be less than $2,120,000?
P(X>2,120,000)
P(Z<-1.631)
P(Z> 1.631)
=0.0516 =5.16%
Q4- HSBC offers to pay a certain sum of $2,150,000 in return for the revenue in local currencies. What do you think, is this a good offer for USASuperCars or not?
The probability to exceed $2,150,000 is 8 4% or more which is very high, So it is possible to create more revenue.
Q-5
The Sales Manager is more risk averse if he accepts the offer However, if the CEO refuses this offer, it might be generating more revenue
Q-6: What other risks is the bank taking apart from the uncertainty in the exchange rates?
The exchange rate may change and go down due to economic fluctuations or political events so HSBC bank might struggle with these issues, which might mean the bank loses the chance of investment of its money in local countries instead of investing its money in the other places that have more gains
Q-8)
USA Super Cars has accepted HSBC's offer. Now consider the bank's risk, assuming the bank will convert all currencies into US dollars at the prevailing exchange rates. What is the probability that the bank will incur a loss?
If the revenue is less than $2,150,000 as calculated previously, the probability is %17Y11. So, the bank may incur losing the profit of this transaction
Q-9) The bank defines its Value-at-Risk as the loss that occurs at the 5th percentile of the uncertain revenue (5% left tail of the distribution). What is the bank's Value-at-Risk and what is the bank's expected profit?
(VAR) =-1.64* 44668.32197= -$731, • 05
- The expected profit is
= 2,192,868 — 2,150,000 = $ 42,868
References
Allayannis, G., Brown, G. and Klapper, L. (2001). Exchange rate risk management. Washington, D.C.: World Bank, Development Research Group, Finance.
Allayannis, G., Brown, G. and Klapper, L. (2001). Capital structure and financial risk. Washington, D.C.: World Bank, Development Research Group, Finance.
Allayannis, G. and Brown, G. (2005). Legal effectiveness and external capital. Washington, D.C.: World Bank, Development Research Group, Finance Team.
Dayananda, D. (2002). Capital budgeting. Cambridge, UK: Cambridge University Press.
Homaifar, G. (2004). Managing foreign exchange risk. New York: Wiley.
Homaifar, G. (2009). Securitization manual. [S.l.]: Univ Readers.
Kamil, H. (2012). How do exchange rate regimes affect firms' incentives to hedge currency risk?. [Washington, D.C.]: International Monetary Fund.
Moguillansky, G., Bielschowski, R. and Pini, C. (2001). Investment and economic reforms in Latin America. Santiago, Chile: United Nations, Economic Commission for Latin America and the Caribbean.
Tas, D. (2008). Essays on exchange rate risk, asset returns and trade flows in East Asian emerging market economies.
