Pradas Case - Exchange Rate in the International Business - Book Report/Review Example

Financing international Operations Introduction This paper contains responses to two case studies done in different parts. That is part one, two and three. The fist part is comprised of answers to a case study named “Does the devil really wear Prada”, the second part is comprised of answers to a case study named “hill international”. The last part comprises the broader lessons for the international business and their managerial implications. Below are the sections. Part 1 Do you agree with the decision to list an IPO or should Prada consider other financing options?

What are the pros/cons of such options? – Prada made the right option concerning the financing method. The pros of this option include avoiding high leverage thus reducing the company’s exposure to default risks. However, the cons of the option is a reduced control over the company by the Private owners (Daniels, Radebaugh & Sullivan, 2013). Are there any downsides to Prada’s decision to list in Hong Kong? – Yes, Prada had hoped for a higher investor turn up than was actually experienced.

Secondly, the numbers of shares sold were not as high as expected and lastly, the share price was lower than anticipated. Concisely, the downside of their choice was raising lower funds than expected. What types of foreign exchange risk does Prada face? – Prada faces translation and operational risk that occurs during the conversion of revenues from foreign to home currency. What advice would you give them to hedge against their risks? – They should consider using forward market hedge. This is an agreement between more than one party, to exchange currencies, in the future, at a rate determined in the current period (Daniels, Radebaugh & Sullivan, 2013).

Part 2 What role did the Korean government play in creating the 1997 crisis? – The Korean government through Kim Young-Sam, then the incumbent president, did a lot of encouragement to invest in export oriented industries in an attempt to increase Korean economic growth level. It is by encouraging the Korean institutions by President Kim that heavy investments were made in new factories without a thoughtful future prediction of the consequences (Hill, 2013). What role did Korean enterprises play in creating the 1997 crisis?

– The Korean enterprises such as the Chaebol took the President’s encouragement and acted rashly. The company managed to fund its heavy investment through debt facilities. Choebol’s capital structure reflected a highly leveraged position. The value of debt was four times that of the shareholder’s equity. Other enterprises made investments based on the unrealistic forecast on demand on their products. The Korean market was saturated with products such as DRAMs. There was an unanticipated sales decline, which negatively affected revenue streams of many organizations.

Consequently, they could not service their heavy debts. High debts and unrealistic demand forecast are the role of the enterprises in the crisis (Hill, 2013). Why was the Korean central bank unable to stop the decline in the value of the won? – The Korean Central bank did not help settle the heavy debt problem that faced many South Korean companies. This was the underlying problem and a failure to which, the value of won decrease despite any attempt by the central bank (Hill, 2013). What are the common elements between the Korean financial crisis in 1997 and the economic meltdown that the United States experienced in 2008?

Should the U. S. government have done anything different to prevent the meltdown? Just like in the Korea, the financial crisis in the U.S. was caused by a failure on the government side to control the financial market thus allowing companies to take unnecessary borrowing risks. The U.S should have put a borrowing limit on the financial market, to help reduce the level of debts to the borrowing companies. This would reduce leverage and help companies evade default risks (Hill, 2013). Part 3 The international business arena is faced with many risks such as exchange rate.

Movement in the exchange rate has either a negative or a positive influence on the value of currencies traded. The Korean case proves the assertion. Concerning the Prada’s case, it is important to note that other risks of international operation are operational and translation. Therefore, it is important to engage in risk mitigation methods such as the use of derivatives (Denzel, 2010). References Daniels, John D., Radebaugh, Lee H., and Sllivan, Daniel P. (2013). International business: Environments and operations.

New York: R.R. Donnelley. Denzel, M. A. (2010). Handbook of world exchange rates: 1590-1914. Farnham [u.a.]: Ashgate. Hill, Charles W.L. (2013). International business: Competing in the Global marketplace. New York: RR Donnelley.