Incoterms 2010 and International Business - 101
International Business: Environments and Operations, 15e (Daniels et al.)
CHAPTER TEN: GLOBAL CAPITAL MARKETS
CHAPTER TEN: GLOBAL CAPITAL MARKETS
OPENING CASE: GPS: In the Market for an Effective Hedging Strategy?
In 2000, Wells Fargo & Company and First Security Corporation merged. In 2002, three key executives at First Security took the opportunity to form GPS Capital Markets Inc. (GPS). The new company’s focus was providing foreign-exchange services, and their competitive advantages included lower transaction costs, 100% transparency, and customizing solutions for their clients. Traditionally, clients use commercial banks that they have a relationship with to provide these foreign-exchange services. As the company grew, they realized that they needed to develop a broader base of services. They faced several challenges and then the global financial crisis hit. This was a mixed blessing, giving and then taking away new clients. GPS responded to the need for expansion by developing FXpert software and helping customers net transactions to save on exchange costs. GPS looks to the future by expanding partnerships with clients’ banks and refining their message and marketing strategies.
Questions
- What is the unique market niche for GPS, and what does it have to offer compared to larger banks and other financial institutions?
GPS initially decided to target small and medium-sized companies (SMEs) and focus on serving those that had significant foreign exchange needs, but had no internal staff dealing with foreign-exchange issues. The competitive advantage GPS has over commercial banks is lower transaction costs and a commitment to developing quality relationships by customizing solutions to satisfy customer needs. (LO: 6, Learning Outcome: Explain how offshore financial centers are used to raise funds and manage cash flows, AACSB: Dynamics of the Global Economy)
- What do you think are the major obstacles to success for GPS in Europe?
They need to understand the different regulatory environments in Europe. Additionally, they need to make sure that the financial executives in these countries know who GPS is and what they have to offer. (LO: 6, Learning Outcome: Explain how offshore financial centers are used to raise funds and manage cash flows, AACSB: Dynamics of the Global Economy)
CLOSING CASE: Does the Devil Really Wear Prada?
The Prada Group is one of the top luxury businesses in the world. It is a closely held firm. The company previously considered going public in the form of an IPO to acquire capital for future expansion. However, the company recognized that an IPO would force the company to deal with outside shareholders, and alter the ownership structure of the organization. Further, the company had to also make decisions regarding where an IPO should be offered. Some advocated a listing on the Milan Stock Exchange, and others in Asia, which is closer to future growth markets. The China market was particularly appealing. The company eventually opted for an IPO in Hong Kong. In light of the European debt crisis and market uncertainty, time will tell whether the venture will be successful for the organization.
QUESTIONS
10-3 Why does Prada need to raise additional funds?
Prada needs to raise additional funds to remain competitive in the industry and to gain access to emerging markets in China. The company is increasing their number of stores and expanding its global presence. Prada has also experienced liquidity problems in the past. (LO: 1, Learning Outcome: To describe the finance function and how it fits in the MNE’s organizational structure, AACSB: Analytical Skills)
10-4 Do you agree with the decision to list an IPO, or should Prada have borrowed more money, possibly floating a dim sum bond or a Eurobond in London or elsewhere?
Students may advocate either choice. The decision to issue the IPO may permit more capital, but requires that the ownership structure of the organization be altered. A bond venture may allow the organization to retain ownership, but it will be obligated to repay its debt obligations. (LO: 2, Learning Outcome: To show how companies can acquire outside funds for normal operations and expansion, including offshore debt and equity funds, AACSB: Analytical Skills)
10-5 What do you feel are the best justifications for Prada to issue the IPO in Hong Kong? Are there any downsides to their decision to list in Hong Kong?
Prada can argue that the decision to base the IPO in Hong Kong is justified based upon the fact that the region is closer to the growing markets that the company is targeting for future growth. Additionally, instability in the EU and the fallout from the Euro debt crisis may lend further credibility to the decision. (LO: 4, Learning Outcome: Show how companies can raise capital on stock markets outside their home countries, AACSB: Dynamics of the Global Economy)
10-6 Many of the other luxury fashion companies are also largely family owned. What is the impact to Prada of diluting the family ownership, and is this a model that other companies can be expected to follow?
Prada will now have to deal with the demands and expectations of outside ownership. Consequently, the organization will have to take the rights of these additional stakeholders into account when making strategic and operational decisions. Other companies may follow the model if it is successful. (LO: 1, Learning Outcome: To describe the finance function and how it fits in the MNE’s organizational structure, AACSB: Analytical Skills)
10-7 What type of foreign exchange risk does Prada face, and what advice would you give them to hedge against their risks?
Prada could use a number of strategies to hedge operationally. One thing it could do is to balance exposed assets with any exposed liabilities. It could also use a leading and lagging strategy with cash flows, and/or balance revenues in one currency with expenses in the same currency. (LO: 6, Learning Outcome: To describe how companies protect against the major financial risks of inflation and exchange-rate movements, AACSB: Dynamics of the Global Economy)
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International Business: The New Realities, 4th Edition, Cavusgil, Knight & Riesenberger
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International Business, 15th Edition, Daniels, Radebaugh & Sullivan
International Business: A Managerial Perspective, 8th Edition, Griffin & Pustay
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