International Finance Airbus and Boeing Essay Example | Topics and Well Written Essays - 1250 words

International Finance Airbus and Boeing - Essay Example Boeing Company is the largest aerospace company of US. Its operations are in more than 90 countries. The commercial airplane division is the most prominent of all divisions. The company is headquartered in Illinois and known as premier US aircraft manufacturer. Boeing's revenue in the year 2010 was $64.31 billion and first-half revenue in 2011 was $31.45 billion. The company is subject to foreign currency exchange risk for company's revenue comes through its operations in various locations and company also makes payments to suppliers in foreign currencies. The company needs to manage foreign currency risk by entering into the foreign currency forward contracts, hedging the price risk associated with receipts and payments with respect to current business. The forward contracts neutralize the effect of any negative exchange rate fluctuations and safeguard the company. Airbus is headquartered in Toulousse and owned by EADS. Airbus' operations are spread throughout the world with total workforce of more than 119,000. The company's costs are made in euro but bulk of the revenues comes in US dollar. Airbus has long delivery periods for the order received today for the aircraft the delivery will be made only after 4-5 years. In view of this, they need to enter into forward contracts to lock currency exchange rates to safe guard themselves because they should not lose when the final payments are made to them on delivery. The company’s half of the cost are paid in Euros and the company needs to hedge for at least two years at the appropriate rates against dollar for bulk of its revenue comes in dollars. The company should also make its European suppliers to bill them in dollars so that currency risk is passed on to them. Discuss a framework a firm might adopt for capital budgeting internationally. A multinational or for that matter any firm operating internationally is always worried about the revenue streams or cash flows that their investments in some other country will bring. The conversion value fluctuations between host and home currencies may make all the difference in budget and actual cash flows received after implementation of the project. 1. An international firm may adopt a simple approach as per the following. 2. Estimating future cash flows in host country currency where investment has been made. 3. Estimating an appropriate discount rate in foreign currency based on the interest rate and prevailing inflation rate in that country. 4. All revenues streams for the expected life of the project are calculated in the foreign currency of the country of operation and the same are converted to Net present value (NPV) using the discount rate also called cost of capital. 5. Converting the foreign currency NPV as calculated above into own currency using the spot exchange rate In another approach, a firm may first convert the foreign cash flows into own currency at the exchange rate expected to prevail. Then the firm may calculate its NPV based on the cost of capital prevailing in its own country. Any of the above approaches will bring the same result s. Again, in order to safeguard and mitigate the risk involved with the capital invested at international shore, the company needs to enter into a suitable forward currency contract as per the cash flows available to them for remittance to own country. Critically assess the work of the credit rating agencies and suggest possible reforms to improve their functioning. Briefly discuss whether your reforms could have prevented the â€Å"Credit Crunch†. The credibility of credit rating agencies has gone downhill after subprime crisis. The high ratings they awarded to residential mortgage-backed bonds facilitated commercial transactions across all financial markets in US and Europe. At times, their action raises host of doubts in the investor's mind. The Enron case reminds us how rating