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is Chapter 4. Problem 1C 0 Bookmark Show all steps: ON Problem Clover Machines: Effects of Emerging Market Currencies Clover Machines continues its operational push abroad. Following revisions to its strategic plan, it has set up subsidiaries in South America and Asia to add to its subsidiaries in Europe. Consequently, Clover expects its foreign revenues to rise from a current level of 12 percent of total revenues to 15 percent in the coming year. A long-term goal is to increase this ratio to 40 percent Expansion also means that Clover is exposed to emerging market currencies. Although derivatives-options, futures, and swaps-can be used to reduce currency effects somewhat, it would be prudent to understand currency fundamentals as an aid to long-term business planning, Emerging market currencies in particular appear to follow different dynamics. Brian Bent, Clover's CFO, reviews conventional wisdom on emerging currencies that is summarized as follows: Low correlation with the USD and high standard deviations. Highly sensitive to capital account flows, especially with respect to activities of foreign institutional investors (Fil). Highly sensitive to macroeconomic conditions. Highly sensitive to political conditions, Mr. Bent is concerned about the firm's plan expand in India. Both in construction and agricultural machines, a low current market size deterred potential market entrants in the past. However, Clover is willing to take a long-term perspective. In the construction industry, booming end-user demand and rising labor rates can mean only exponential growth in demand for Clover and other providers machines. The agricultural sector India is also large but fairly is Chapter 4. Problem 1C 0 Bookmark Show all steps: ON Mr. Bent is concerned about the firm's plan expand in India. Both in construction and agricultural machines, a low current market size deterred potential market entrants in the past. However, Clover is willing to take a long-term perspective. In the construction industry, booming end-user demand and rising labor rates can mean only exponential growth in demand for Clover and other providers of machines. The agricultural sector in India is also large but fairly unproductive compared to other countries: This again could lead to great demand for machinery in the future. Many factors are countering this potential demand. First, a small handful of local producers are making (low-horsepower) low-quality machines but sell them at correspondingly low prices; Clover will have to make the case for its higher quality and higher cost machines. Second, and more germane to this case, the Indian rupee (INR) has showed recent signs of volatility. Mr. Bent is concerned about how changes in INR can impact Clover's business, especially in India. Of particular concern is unexpected depreciation of the INR. A financial analyst at Clover reporting to Mr. Bent has collected the following salient details pertaining to the INR History of the INR in the 1990s: After being range bound for much of the decade, INRUSD rose more than 15 percent in the period August 2006 to October 2007. More than half of these gains were given up in 2008. A strong recent correlation appears to exist between INRUSD and the SENSEX (main stock market indicator, in Yahoo! use symbol "BSESN). The SENSEX had a very strong year in 2007: It touched 20,000 for the first time that December. In 2008, however, the SENSEX lost more than 30 percent from its peak, breaching the 13,000 mark in July INRUSD 0.0260 0.0255 0.0250 0.0245 INRUSD is Chapter 4. Problem 1C 0 Bookmark Show all steps: ON 0.0245 0.0240 0.0235 0.0230 0.0225 INRUSD 0.0220 0.0215 0.0210 Sep-02 Jan-04 May-05 Oct-06 Feb-08 Jul-09 CASE EXHIBIT 4.1 Indian Rupee The Indian economy continues to do well despite high oil prices (India is a net importer of oil). Growth is pegged at 8 to 9 percent. However, inflation is running at around 10 percent. Severe labor shortages in certain sectors (e.g., textiles, IT) have pushed up wages more than 10 percent a year in the last two years. Transportation costs have also risen significantly. Short-term interest rates are more than 10 percent. - India follows the parliamentary system. Because it could not gather a majority on its own, the governing party has put together a coalition of various parties with seemingly different ideologies. Recently, the coalition was threatened over a nuclear treaty that India signed with the United States. A major partner withdrew from the coalition and made a no-confidence motion. The ruling party won the resulting vote by a slim margin: 275 for versus 256 against. The stock market rose more than 10 percent in response, but the INR did not respond to these developments. Based on these facts, evaluate the currency and its prospects. Indicate theoretical models and ideas that you have used in determining this assessment. Extend your analysis to a second BRIC currency by collecting similar data from Internet and other sources. is Chapter 4. Problem 1C 0 Bookmark Show all steps: ON Problem Clover Machines: Effects of Emerging Market Currencies Clover Machines continues its operational push abroad. Following revisions to its strategic plan, it has set up subsidiaries in South America and Asia to add to its subsidiaries in Europe. Consequently, Clover expects its foreign revenues to rise from a current level of 12 percent of total revenues to 15 percent in the coming year. A long-term goal is to increase this ratio to 40 percent Expansion also means that Clover is exposed to emerging market currencies. Although derivatives-options, futures, and swaps-can be used to reduce currency effects somewhat, it would be prudent to understand currency fundamentals as an aid to long-term business planning, Emerging market currencies in particular appear to follow different dynamics. Brian Bent, Clover's CFO, reviews conventional wisdom on emerging currencies that is summarized as follows: Low correlation with the USD and high standard deviations. Highly sensitive to capital account flows, especially with respect to activities of foreign institutional investors (Fil). Highly sensitive to macroeconomic conditions. Highly sensitive to political conditions, Mr. Bent is concerned about the firm's plan expand in India. Both in construction and agricultural machines, a low current market size deterred potential market entrants in the past. However, Clover is willing to take a long-term perspective. In the construction industry, booming end-user demand and rising labor rates can mean only exponential growth in demand for Clover and other providers machines. The agricultural sector India is also large but fairly is Chapter 4. Problem 1C 0 Bookmark Show all steps: ON Mr. Bent is concerned about the firm's plan expand in India. Both in construction and agricultural machines, a low current market size deterred potential market entrants in the past. However, Clover is willing to take a long-term perspective. In the construction industry, booming end-user demand and rising labor rates can mean only exponential growth in demand for Clover and other providers of machines. The agricultural sector in India is also large but fairly unproductive compared to other countries: This again could lead to great demand for machinery in the future. Many factors are countering this potential demand. First, a small handful of local producers are making (low-horsepower) low-quality machines but sell them at correspondingly low prices; Clover will have to make the case for its higher quality and higher cost machines. Second, and more germane to this case, the Indian rupee (INR) has showed recent signs of volatility. Mr. Bent is concerned about how changes in INR can impact Clover's business, especially in India. Of particular concern is unexpected depreciation of the INR. A financial analyst at Clover reporting to Mr. Bent has collected the following salient details pertaining to the INR History of the INR in the 1990s: After being range bound for much of the decade, INRUSD rose more than 15 percent in the period August 2006 to October 2007. More than half of these gains were given up in 2008. A strong recent correlation appears to exist between INRUSD and the SENSEX (main stock market indicator, in Yahoo! use symbol "BSESN). The SENSEX had a very strong year in 2007: It touched 20,000 for the first time that December. In 2008, however, the SENSEX lost more than 30 percent from its peak, breaching the 13,000 mark in July INRUSD 0.0260 0.0255 0.0250 0.0245 INRUSD is Chapter 4. Problem 1C 0 Bookmark Show all steps: ON 0.0245 0.0240 0.0235 0.0230 0.0225 INRUSD 0.0220 0.0215 0.0210 Sep-02 Jan-04 May-05 Oct-06 Feb-08 Jul-09 CASE EXHIBIT 4.1 Indian Rupee The Indian economy continues to do well despite high oil prices (India is a net importer of oil). Growth is pegged at 8 to 9 percent. However, inflation is running at around 10 percent. Severe labor shortages in certain sectors (e.g., textiles, IT) have pushed up wages more than 10 percent a year in the last two years. Transportation costs have also risen significantly. Short-term interest rates are more than 10 percent. - India follows the parliamentary system. Because it could not gather a majority on its own, the governing party has put together a coalition of various parties with seemingly different ideologies. Recently, the coalition was threatened over a nuclear treaty that India signed with the United States. A major partner withdrew from the coalition and made a no-confidence motion. The ruling party won the resulting vote by a slim margin: 275 for versus 256 against. The stock market rose more than 10 percent in response, but the INR did not respond to these developments. Based on these facts, evaluate the currency and its prospects. Indicate theoretical models and ideas that you have used in determining this assessment. Extend your analysis to a second BRIC currency by collecting similar data from Internet and other sources

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