OSRAM Case Solution
International Finance – Eiteman Stonehill Moffett
Date of submission
This report considers macroeconomic condition of Dubai, where OSRAM is considering investing in and the analysis of currency movement compare to US dollar with the forecast of future 5 years and 10 year rates with recommendation to mitigate foreign currency riskand suggested appropriate method of business growth
Analysis of macroeconomicin Dubai
The economic condition in Dubai is expanding since the last few years encouraging a foreign investment. There are three factors that drive the economic condition, and these are; fiscal policy, unemployment rates/GDP and exchange rates.
The government is carrying out extensive expansionary monetary policy to stabilize prices and to sustain economic growth while increasing budget for infrastructure as well as it has improvedGDP. Moreover, the government has also been issuing bonds to accumulate cash to finance at reasonable rates to the business with the aim to diversify economic strategy. Dubai also has the lowest unemployment rates which is less than 5% and the GDP growth rate is 3.9% and with small movements in inflation rates,which is 1.76% currently and looks promising to stable economic condition and maintain exchange rates.
Preliminary macroeconomic conditions seem favorable, indicating the go ahead for further strategic evaluation to establish manufacturing facility in Dubai.The sound economic condition would increase the investors’ confidence to forecast the sales and profit growth figures as well as it would also be helpful to deal the necessary adjustment to budgets as per the result of ongoing monitoring process of economic conditions
Analysis of Emirati Dirham over / under valuation compare to us $
Currently, the US dollar has strengthened ascompare to Emirati dirham, which is currently 1$/3.67AED. However, the inflation rate of both countries determines the exchange rates, which has resulted in over/under valuation of currency. Furthermore, exchanges rates have key importance for ORSAM, because adverse movements may constitute a loss in translating the project investment, as a result,making it less viable to attract for strategic decision.
Currently, Emirati Dirham is well maintained and is fairly represented as the inflation rates are stable in the region. Furthermore, the increase in inflation rates will devalue the Emirati dirham and strengthen the US dollar, $ which could have an adverse movement in trade as OLED product will become expensive while the decrease in the inflation rate will strengthen the Emirati dirham, which will reduce the profits of investment made by ORSAM.
Analysis of Forecasted Exchange rates using purchasing power parity formula
|Spot exchange rate||3.67|
|Exchange rate predicted for next year||3.74|
|Exchange rate predicted in 2020||3.70|
|Exchange rate predicted in 2025||3.70|
The forecasted exchange rates show that Emirati dirham will slightly weaken by next year however, it will continue to be constant and then slightly it strengthen for up to 10 years from now, which indicates the stable economy of the business environment.
Reliance on forecasted results
OSRAM cannot remain dependent on these rates even though it is based on logical explanation since the factors do change, which drive the exchange rate and as long as the period forecasted is bigger, there is more risk that the actual result obtained deviates from the forecasted results. Therefore, the sensitivity analysis needs to be carried out on key variable of the project to assess the impact likely to be generated and whether it is in the risk appetite of OSRAM or whether it requires appropriate course of action to be taken in this regard.
Determinants of the foreign exchange rates
As per the above exhibit, there are three factors which contribute in establishing foreign exchange rate apart from inflation.The movements and short term interest rates also devise the movement in exchange rates however, it is merely dependent on the inflation rates that drive through incorporating the other factors
Other factors such as political stability and liquidity of cash for spending and investing affect the interest rates and inverse relation, which is inflation rate and interest increase to reduce liquidity in market
The portfolio of investment is also the contributing factor of exchange rates which companies invest to keep the diversified portfolio to eliminate the unsystematic risk, which arises due recession in an industry for the time being while promoting the other industry in same period. Furthermore, OSRAM can balance the portfolio of investment by making the investment in Dubai to diversify its risk to other exchange rates in the country it is dealing in………………………
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