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ASSIGNMENT INTRODUCTION
Question 1 (3 Marks):Assume a Saudi Multinational Corporation decided to do a project in Germany one year ago (December 1st, 2021), which would be completed on November 30th, 2022. Suppose the project costs 100 million euros and is expected to generate income of 150 million euros on November 30th, 2022.The exchange rate at the beginning of the project is 0.23 Euro/SAR, and it is 0.27 Euro/SAR at the end of the project.There is no derivative bearing SAR currency, but there is a way for a Saudi firm to engage in the forward/options market.
Calculate the initial investment in SAR.
Show the choices for financing this project by the Saudi firm.Just show without calculation.
Calculate the profit from this investment in Euro and SAR also show whether the Saudi firm was hurt or benefited from changes in the exchange rate movement.
How would the Saudi firm hedge against the exchange rate risk?
Question 2 (3 Marks): The US is considered a country that borrows at a lower cost of capital than the rest of the world; briefly explain why.
Question 3 (3 Marks): According to Vision 2030, Saudi Arabia planned to diversify its production, and one of the production divisions is Small & Medium Enterprises (SME).The goal by 2030 is to make 35 percent of GDP from SMEs.Briefly explain whether Saudi Arabia can achieve this goal within this time frame and how the Saudi private equity market would attract foreign SMEs.You might do a little research about this.
Question 4 (3 Marks): There are two theories related to where Foreign Direct Investment (FDI) would be invested; one of them is the behavioral approach, which is that firms first invest in closer countries considered synch.Explain how this would relate to Saudi firms invested in other countries.Do you think this theory applies to Saudi firms, or do they usually invest in western countries?
Question 5 (3 Marks): If one of the Saudi banks (i.e., Al Bilad Bank) merges with another international bank (i.e., First Abu Dhabi Bank) to have a higher market share in the banking industry. Would you think a local firm’s action of merging with an international firm justifiable to increase its concentration on the industry globally? Discuss.
HOW TO WORK ON THIS ASSIGNMENT ( EXAMPLE ESSAY/ DRAFT)
Question 1: Financing and Hedging Strategies for a Saudi Multinational Corporation’s Project in Germany
Introduction: A Saudi Multinational Corporation has decided to do a project in Germany with the project starting on December 1st, 2021 and ending on November 30th, 2022. The project costs 100 million euros and is expected to generate income of 150 million euros on November 30th, 2022. The exchange rate at the beginning of the project was 0.23 Euro/SAR, and it is 0.27 Euro/SAR at the end of the project.
Calculating the Initial Investment in SAR: To calculate the initial investment in SAR, we first need to convert the 100 million euros to SAR using the exchange rate of 0.23 Euro/SAR.
100 million euros * 0.23 Euro/SAR = 23 million SAR
Choices for Financing the Project: The Saudi firm has several options for financing the project, including:
- Borrowing from a bank
- Issuing bonds or shares to raise capital
- Obtaining a loan from a financial institution
- Utilizing internal funds
Calculating the Profit and Assessing Exchange Rate Movement: The project is expected to generate 150 million euros in income on November 30th, 2022. The profit can be calculated by subtracting the initial investment of 100 million euros from the expected income of 150 million euros.
150 million euros – 100 million euros = 50 million euros
To convert the profit back to SAR, we can use the exchange rate of 0.27 Euro/SAR.
50 million euros * 0.27 Euro/SAR = 13.5 million SAR
Comparing the initial investment in SAR and the profit in SAR, we can see that the exchange rate movement has benefited the firm. The initial investment was 23 million SAR, and the profit was 13.5 million SAR, meaning the firm has made a profit of 10.5 million SAR due to the increase in the exchange rate from 0.23 Euro/SAR to 0.27 Euro/SAR.
Hedging Against Exchange Rate Risk: The Saudi firm can hedge against exchange rate risk by engaging in the forward/options market. By entering into a forward contract, the firm can lock in the exchange rate at the time of the contract and avoid the risk of fluctuations in the exchange rate. Additionally, the firm can use options to hedge against the risk of exchange rate movements.
Question 2: The Lower Cost of Capital in the US
Introduction: The United States is considered a country that borrows at a lower cost of capital than the rest of the world.
Explanation: The lower cost of capital in the US can be attributed to several factors, including the stability and size of the economy, the strong legal system, and the developed financial markets. The US has a well-established credit rating, and its economy is one of the largest and most stable in the world. This stability and size attract investors, making it easier for the US to borrow at a lower cost. Additionally, the US has a strong legal system, which provides investors with protection and reduces the risk of investment. Finally, the US has well-developed financial markets, providing access to a wide range of investment opportunities and making it easier for the US to borrow at a lower cost.
Question 3: The Potential for Small & Medium Enterprises in Saudi Arabia’s Vision 2030
Introduction: According to Vision 2030, Saudi Arabia has planned to diversify its production, with one of the production divisions being Small & Medium Enterprises (SMEs). The goal by 2030 is to make 35
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