Introduction

Discussions are designed to help you critically analyze an international business problem, at times using the theories and frameworks described in your textbook.

Instructions

Read the closing case ‘The Fluctuating Value of the Yuan Gives Chinese Businesses a Lesson in Foreign Exchange Risk’ at the end of the Foreign Exchange Market chapter and answer the following: What is the impact of currency depreciation on Chinese importers? What ciould they have done to reduce the impact of yuan depreciation against the dollar in 2016? What about Chinese exporters? What could they have done to reduce the impact of yuan appreciation against the dollar in 2017?

Directions

• Students are advised to post at least two responses to each discussion question, one of which should be a reply to someone else’s post. Students who post only one response can earn a maximum score of 25/35 (71%) only, regardless of the quality of that post.
• Discussions need to be professional. Please make proper use of capitalization to begin sentences; also make sure that there are no misspellings, incomplete sentences, or other violations of grammatical rules.
• The basic criterion for a discussion post to be considered effective is that your message must be original and intelligible. You must communicate concisely and effectively. In addition, you must meet the weekly requirements for full credit on discussion assignments (additional criteria in the discussion rubric).
• You must keep each response within a word limit of 300 words.

Evaluation Criteria

All discussions together make up 35% of the total course score. This discussion is worth 35 points. Here is the rubric Download rubricfor this discussion.

Write a comment for the each responses below: (keep each comment within a word limit of 300 words.)

Response 1: When the Yuan depreciated relative to the USD, Chinese importers would find that anything they were importing denominated in USD would be more expensive. Chinese airlines were probably particularly negatively impacted as imported fuel and crude oil are likely to be denominated in USD due to the petrodollar system. Additionally, airlines have notoriously thin profit margins. What may seem like a small price increase in fuel could erase a sizable portion of an airline’s profit margin. I’m sure other types of Chinese firms dependent on imports suffered similarly if they were unable to raise prices to compensate.

Assuming they could accurately predict the Yuan depreciation, Chinese firms could have tried to implement a lag strategy, increase the amount of dollar-denominated receivables, and delay the collection of these receivables until after the expected appreciation of the USD. This would have allowed these firms to offset some of the disruptive effects of the currency value fluctuation with steady flows us USD. The opposite tactic could have been taken if Chinese firms expected the Yuan to appreciate against the dollar. Firms could attempt to move away from dollar-denominated receivables and seek payment as quickly as possible for any remaining USD receivables before the value of the receivables has been compromised.

Unfortunately, Chinese exporters may have suffered when the Yuan appreciated because their products might have become uncompetitive in international markets. If this appreciation was expected to be long-term, Chinese firms might consider setting up FDI operations in areas with costs low enough for them to produce competitive products.

Response 2: The depreciation of the yuan against the dollar in 2016 had a notable impact on Chinese importers, particularly those reliant on purchasing goods priced in dollars. For instance, Chinese airlines faced higher costs for aviation fuel, which is commonly priced in dollars. This depreciation meant that importers had to exchange more yuan to acquire the necessary dollars to pay for their imports, thereby increasing their expenses and reducing profitability. To counteract the negative effects of yuan depreciation, importers could have implemented various strategies. One approach is currency hedging, wherein importers use financial instruments like forward contracts or options to lock in favorable exchange rates for future transactions. This helps mitigate the impact of currency fluctuations on costs. Additionally, importers could renegotiate contracts with suppliers to include clauses that adjust prices based on changes in exchange rates, thereby sharing the currency risk with suppliers and reducing the impact of yuan depreciation on import costs.

On the other hand, the appreciation of the yuan against the dollar in 2017 posed challenges for Chinese exporters by increasing the dollar price of Chinese goods. This could lead to reduced competitiveness in international markets and squeezed profit margins for exporters. To address these challenges, exporters could have employed several strategies. One option is diversifying export markets to reduce reliance on countries with currencies closely tied to the dollar. By expanding into markets with currencies less affected by dollar fluctuations, exporters can mitigate the impact of yuan appreciation on export revenues. Moreover, exporters could engage in currency hedging to protect against adverse exchange rate movements. This involves using financial derivatives to lock in favorable exchange rates for future export earnings, thereby reducing the vulnerability to currency appreciation. Additionally, exporters could adjust pricing strategies to reflect changes in exchange rates, such as raising prices in markets experiencing currency appreciation to maintain profitability. Lastly, enhancing operational efficiency and cost-cutting measures can help offset the impact of reduced profit margins resulting from currency appreciation.

Requirements: response within 200-300 words.