This is a Thunderbird Case Study. This case study is narrates the real life episodes of several organizations that we have been a part of and that want to grow their business into the developing countries. The case chalks out and demonstrates a structure of review and assessment that emphasizes on analyzing foreign exchange rate threats, country risk analysis, and the decision-making process carried out by the managerial team in choosing a target country and about administering the risks related with the choice made. The case gives data on four potential countries of interest for which procedures of predicting exchange rates (PPP, IRP, IFE, B/P) can be made use of. The case also allows the chance for evaluatingif a government is followingadequate macroeconomic rules and regulations to escapepredicaments. Finally, the case provides for an assessment of the prospect of a foreign exchange, financial, foreign debt, and banking crisis in any one of the selected or all four of the countries. Though the case can be utilized to discuss macroeconomic structuralresolves, its actual aim is to observe management's decision-making methods to recognize and controlpotential threats related with growing the business into developing countries and emerging markets.
a) Find the U.S. inflation rates between 2002 and 2007 from the IMF website and calculate the Purchasing Power Parity (PPP) exchange rates for Countries A,B,C,D in the case study. (The inflation rate in each country in the case can be calculated from the Consumer Price Index. For example: inflation in 2003 for Country A =14.7% = (132.9-115.9) /115.9)
b) Did Purchasing Power Parity theory hold in these countries? Which currencies are over- or under-valued against the US dollar?
c) Find the U.S. dollar lending rates (prime rate) between 2002 and 2007 from the IMF website or the U.S. Federal Reserve website and calculate whether International Fisher Effect (IFE) theory held between the exchange rates of Countries A to D and the US dollar.
d) Based on your PPP and IFE calculations above in which countries do you expect a significant depreciation or appreciation (convergence to the PPP equilibrium rate) in the near next three to five years?
In the case study, Susan from Tower Associates is not familiar with the financialization literature. Discuss how financialization can be a possible cause of country crises by referring to the arguments and evidences in Ertürk (2003), Gabor (2010) and Kaltenbrunner (2010).