International Market Expansion and Its Effect on Coca Cola Company - Case Study Example

Running head: international market expansion 23rd May International Market Expansion Examine possible risks of foreign currency exposure for your company and prepare a strategy for how each of these risks can be managed. Please be specific and consider all possible implications to your company. In its efforts, to remain competitive and maintain strong positive relationship with the customers, Coca Cola Company has put in place various marketing strategies. Similarly, the company has emulated effective financial policies in order to ensure its operations are not jeopardized. As a result of engaging in international trade, Coca Cola Company is exposed to various risks of foreign currency. One of the major risks is transaction exposure. This occurs when a company has payables and receivables whose values can change due to the contract being undertaken by the use of foreign currency. In order for an organization to attain the domestic value of the cash flows that have been undertaken by the use of foreign currency, it must exchange the foreign currency for domestic currency. Based on the continuous fluctuation of the exchange rate, Coca Cola is at the risk of the changes in the exchange rate between the US dollar and foreign currencies. As the result of transaction exposure, the income of the company may also be affected. Transaction exposure can be managed by hedging. This implies that payables in a currency in the future in hedged by buying using the same currency in the forward (Homaifar, 2004). Similarly, receivables in the future hedged selling the same currency in the forward. Another risk that Coca Cola may be faced with is economic exposure. This refers to the changes in the market share due to unexpected fluctuations of exchange rates. In this case, the domestic competitors can take the advantage of the fluctuations and take a part of the Coca Cola market share. Another cause of this risk is changes in cash flows from fixed assets. The third type of risk is translation exposure. This refers to the extent to which the exchange rate movement affects the financial reporting of the Coca Cola Company. As the company prepares its consolidated financial statements, it must convert the assets and liabilities of the foreign branches from foreign currencies to domestic currency. As the result, the cash flows may be affected as well as the company’s reported earnings an aspect that may have negative implication on the stock price. Translation exposure can be managed by using appropriate accounting evaluation strategies or indicating such exposures as exchange rate gain or loss. The fourth risk that Coca Cola Company may be faced with is contingent exposure. This refers to the risk that the company faces when negotiating with firms on the foreign projects. As the result of the negotiations, the company may face immediate transactional risk. To address this risk, firms ensure that during negotiations they come up with conditions that are agreed by both parties and not flexible. Evaluate the basic functions of the international banking system and financial market (such as bonds, equity, and money markets) and provide a plan for using these financial markets to finance your global operations. One of the major functions of international banking system is to address the transactional pricing advantages that are experienced by foreign banks dealing with the dollars and euros. Additionally, the bank allows the United States banks to come up with separate books to record foreign transactions. As a result, the banks do not incur the costs of providing federal reserves as indicated by the banking regulations. Another key role of the IBS is that it takes deposit as well as making loans to non resident banks and persons (Valdez, 2010). In this way, international transactions are made effective. As a way of ensuring that the international banks do not compete with domestic banks, the original maturity of the deposit must be at least 2 working days. Financial market refers to the market where companies and individuals can trade financial securities such as bonds and stock. One of the major functions of financial market such as bonds is transferring resources. This implies that it is possible through the financial markets to pass real economic resources to the borrowers from the leaders. Secondly, financial markets improve economy. For example, through the interest that is earned by the investors, they are in a position to invest in many areas thus increasing their own income as well that of the nation. Determination of prices is the third function of the financial markets. This implies that through the interaction of the sellers and the buyers, the prices of the financial assets can be determined (Groz, 2009). Through the price discovery process, they help in allocation of funds within an economy. The fourth function is that they lead to formation of capital. This is due to the savings that the individuals get that they can use to invest in other areas thus enhancing employment rate in a country. Finally, financial markets provide sale mechanism. This implies that the markets provide an investor with an opportunity where they can sell their assets in form of liquid (Pilbeam, 2010). As a way of using financial markets to expand globally, Coca Cola Company can sell more of its shares for example in the US branch where the demand is high and use the funds to establish more branches for example in northern Africa where the demand for its cold brands is high. In this way, the company will effectively face off the stiff competition being experienced in the soft drink industry. Present a financial strategy to support long-term financing of operations for possible expansion of your MNC (taking into consideration portfolio management, capital budgeting and foreign direct investment decisions). A multinational corporation should have sustainable sources of funds in order to effectively expand in the global market. One of the major ways that Coca Cola Company can emulate is participating in foreign capital markets and attracting foreign investors. Through the sale of shares especially in growing economies, the company will generate adequate funds that it can use to expand it corporate social responsibilities in those countries. Additionally, the company can embark on bonds market especially with established banks in foreign countries. As a result, it will obtain adequate capital that it can use to open more braches in the areas it has entered or in new markets. Coca Cola Company has an opportunity of using capital budgeting. This entails investing in new projects and plants in the US and in foreign markets. Through the funds generated by such projects, the company will be able enter new markets thus ensuring that it increases its revenue. One way through which the company can finance its operations through capital budgeting is by payback period. This implies that the company can invest in projects that have a short payback period since they generate revenue at a faster rate (Merton, 1992). Based on the fact that Coca Cola Company operates in more than 200 countries, it is essential that it considers foreign direct investment decisions in its effort to raise funds. For example, it should take into consideration the taxation systems of countries it is investing as a way of ensuring that it complies with the foreign regulation. In this way, the company will enjoy the support of the foreign government once it embarks on establishing a new project. Provide final recommendations based on both your findings and your initial assessment of opportunities and risks on the three dimensions of international finance, economic trends of the country, impact of globalization, and the monetary system. Based on the large number of customers that the company serves globally, it is imperative that effective marketing strategies be adopted. Economic trends of countries are different and as a result, the demand for the Coca Cola Company is different in various regions. This implies that the company needs to undertake an economic analysis of the foreign countries before embarking on foreign direct investments. As more countries forms trading blocks resulting to globalization, international companies have remained competitive. This means that the company should form ties with international companies in other countries thus ensuring that they share knowledge. Coca Cola Company has strong culture of undertaking corporate social responsibilities locally and globally. This implies that if the company opens more bottlers for example in the central and eastern Africa where there is unexploited market, it will ultimately generate more revenue as well as creating more job opportunities. References Groz, M. (2009). Forbes Guide to the Markets. New York: John Wiley & Sons, Inc. Homaifar, A. (2004). Managing Global Financial and Foreign Exchange Risk. NJ: John Wiley & Sons. Merton, C. (1992). Continuous-Time Finance. New York: Blackwell Publishers Inc. Pilbeam, K. (2010). Finance and Financial Markets. London: Palgrave. Valdez, S. (2010). An Introduction To Global Financial Markets. New York: Macmillan Press Ltd. Read More