Multinational_Business_FinanceFifteenth_EditionChapter_6_Mini

Multinational Business Finance

Fifteenth Edition

Chapter 6 Mini Case

Mrs. Watanabe and the Japanese Yen Carry Trade

Slides in this presentation contain hyperlinks. JAWS users should be able to get a list of links by using INSERT+F7

If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed:

1) MathType Plugin

2) Math Player (free versions available)

3) NVDA Reader (free versions available)

1

Mrs. Watanabe and the Japanese Yen Carry Trade (1 of 2)

At more than

(some $16,800bn), these savings are considered the world’s biggest pool of investable wealth. Most of it is stashed in ordinary Japanese bank accounts; a surprisingly large amount is kept at home in cash, in tansu savings, named for the traditional wooden cupboards in which people store their possessions. But from the early 2000s, the housewives—often referred to collectively as “Mrs. Watanabe”, a common Japanese surname — began to hunt for higher returns.

—“Shopping, Cooking, Cleaning… Playing The Yen Carry Trade,” Financial Times, February 21, 2009.

Mrs. Watanabe and the Japanese Yen Carry Trade (2 of 2)

Over the past 20 years, Japanese yen interest rates have remained extremely low by global standards.

This presents opportunity for uncovered interest arbitrage (U I A).

Borrow money where it is cheap and invest it in a different currency market with higher interest returns.

The only real trick is to time the market correctly so that when the currency in the high-yield market is converted back to the original currency, the exchange rate has either stayed the same or moved in favor of the speculator.

Yen Availability (1 of 3)

Japan has consistently demonstrated one of the world’s highest savings rates for decades. This means that an enormous pool of funds has accumulated in the hands of private savers, savers who are traditionally very conservative.

Those funds, whether stuffed in the mattress or placed in savings accounts, earn little in return.

Yen Availability (2 of 3)

A second factor facilitating the yen carry trade is the sheer size and sophistication of the Japanese financial sector.

The Japanese banking sector has been continuously in search of new and diverse investments with which to balance the often despondent domestic economy. It has therefore sought out foreign investors and foreign borrowers who are attractive customers.

Multinational companies have found ready access to yen-denominated debt for years.

Yen Availability (3 of 3)

A third expeditor of the yen carry trade is the value of the Japanese yen itself.

The yen has long been considered the most international of Asian currencies, and is widely traded. It has, however, been exceedingly volatile over time.

The key has been in the relatively long trends in value change of the yen against other major currencies like the U.S. dollar, or as in the following example, the Australian dollar.

Australian Dollar/Japanese Yen Exchange Rate (1 of 2)

Exhibit A illustrates the movement of the Japanese yen/Australian dollar exchange rate over a 13-year period.

This spot rate movement and long-running periodic trends have offered a number of extended periods in which interest arbitrage was highly profitable.

The two periods of Aussie dollar appreciation are clear. During those periods, an investor who was short yen and long Aussie dollars (and enjoying relatively higher Aussie dollar interest) could and did enjoy substantial returns.

Exhibit A the Trending J P Y and A U D Spot Rate

For long description, see slide 17: Appendix 1

Australian Dollar/Japanese Yen Exchange Rate (2 of 2)

Consider the one-year speculation detailed in Exhibit B.

An investor looking at the exchange rate in January 2009 (Exhibit A) would see a yen that had reached a recent historical “low”-a strong position against the Aussie dollar.

Betting that the yen would likely bounce, weakening once

again against the Aussie dollar, she could borrow

million at 1.00% interest per annum for one year. She

could then exchange the

million yen for Australian

dollars at

and then deposit the proceeds for one

year at the Australian interest rate of 4.50% per annum.

9

Exhibit B the Aussie-Yen Carry Trade

For long description, see slide 18: Appendix 2

10

Post 2009 Financial Crisis (1 of 3)

The global financial crisis of 2008–2009 has left a marketplace in which the U.S. Federal Reserve and the European Central Bank have pursued easy money policies. Both central banks, in an effort to maintain high levels of liquidity and to support fragile commercial banking systems, have kept interest rates at near-zero levels.

Now global investors who see opportunities for profit in an anemic global economy are using those same low-cost funds in the U.S. and Europe to fund uncovered interest arbitrage activities. But what is making this “emerging market carry trade” so unique is not the interest rates, but the fact that investors are shorting two of the world’s core currencies: the dollar and the euro.

Post 2009 Financial Crisis (2 of 3)

Consider the strategy outlined in Exhibit C.

An investor borrows E U R 20 million at an incredibly low rate.

The E U R 20 million are then exchanged for Indian rupees (I N R), the current spot rate being I N R 60.4672 = E U R 1.00. The resulting I N R 1,209,344,000 are put into an interest-bearing deposit with any of a number of Indian banks attempting to attract capital.

The rate of interest offered, 2.50%, is not particularly high, but is greater than that available in the dollar, euro, or even yen markets.

But the critical component of the strategy is not to earn the higher rupee interest, it is the expectations of the investor regarding the direction of the I N R per E U R exchange rate.

Exhibit C the Euro-Rupee Carry Trade

For long description, see slide 19: Appendix 3

Post 2009 Financial Crisis (3 of 3)

Carry trade activity is often described in the global press as if it is easy or riskless profit. It is not.

As in the case of the euro-rupee just described, the combination of interest rates and exchange rates is subject to a volatile global marketplace, which does indeed have a lot of moving parts.

Mini-Case Questions

Why are interest rates so low in the traditional core markets of U S D and E U R?

What makes this “emerging market carry trade” so different from traditional forms of uncovered interest arbitrage?

Why are many investors shorting the dollar and the euro?

Copyright

This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.

16

Appendix 1

Long Description for a graph plots Japanese yen per Australian dollar measured monthly from January 2000 to July 2013.

The graph indicates three trends in the monthly yen to dollar rate, as described in the following list. All values are estimated.

The rate generally increased from around 68 in January 2000 to near 105 in January 2007. This change indicates that the Japanese yen depreciated steadily against the Australian dollar from 2000 to 2007.

The rate remained above 100 until 2008. It then fell to around 60 in January 2009.

During the period from 2009 to 2012, the rate once again increased, ending near 102 by January 2013. After the dramatic appreciation in 2008, the yen depreciated steadily again versus the Australian dollar.

Return to presentation

Appendix 2

Long Description for a diagram represents the Aussie yen carry trade.

The Aussie yen carry trade occurs over 360 days. The following list provides the steps in the process.

Start. The investor borrows 50,000,000 yen at 1.00% interest. The funds borrowed at 1.000% per annum bill need to be repaid in one year. The principal and interest on the borrowed funds is 50,000,000 times 1.01 = 50,500,000.00.

The investor converts the yen amount into Australian dollars at a rate of J P Y 60.91 yen = A U D 1.00. J P Y 50,000,000 yen divided by 60.91 = A U D 820,883.

The Australian dollars are then invested at the higher Australian dollar interest rate of 4.50% per annum for one year. A U D 820,883 times 1.045 = A U D 857,823.

The result, principal, and the interest of A U D 857,823 are then converted back to Japanese yen at the current spot rate. With luck, talent, or both, the result is profitable. The spot rate is J P Y 83.19 = A U D 1.00. A U D 857,823 times 83.19 = J P Y 71,362,296.83.

End. The amount owed is J P Y 50,500,000.00. The amount earned is J P Y 71,362,296.83. The profit is J P Y 71,362,296.83 minus J P Y 50,500,000.00 = J P Y 20,862,296.83.

Return to presentation

Appendix 3

Long Description for a diagram represents the Euro rupee trade.

The Euro rupee trade occurs over a 180 day period. The following list provides the steps in the process.

Start. The investor borrows E U R 20,000,000 at 1.00% interest. The funds borrowed at 1.00% per annum bill need to be repaid in 180 days, principal and interest. 1.00% per annum is 1.005 for 180 days. E U R 20,000,000 times 1.005 = E U R 20,100,000.

The investor converts Euros to Indian rupees at I N R 67.40 = E U R 1.00.E U R 20,000,000 times 67.40 = I N R 1,348,000,000.

The Indian rupees are invested at 2.50% per annum, or 1.0125 for 180 days. I N R 1,348,000,000 times 1.0125 = I N R 1,364,850,000. The result, principle, and interest of I N R 1,364,850,000 are converted back to Euros at the spot rate in the market in 180 days of I N R 68.00 = E U R 1.00. I N R 1,364,850,000 divided by 68.00 = E U R 20,071,324.

End. The investor paid E U R 20,100,000. The investor earned E U R 20,071,324. The profit was minus E U R 20,100,000 plus E U R 20,071,324 = - E U R 28,676. Unfortunately, the small movement in the spot rate has eliminated the interest arbitrage profits.

Return to presentation

¥ 1,500,000bn

¥50

¥60.91A$,

.MsftOfcThm_Text1_Fill { fill:#000000; } .MsftOfcThm_MainDark1_Stroke { stroke:#000000; }

Multinational Business Finance

Fifteenth Edition

Chapter 4 Mini Case

Volkswagen’s Defeat Devices and Stakeholder Control

Slides in this presentation contain hyperlinks. JAWS users should be able to get a list of links by using INSERT+F7

If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed:

1) MathType Plugin

2) Math Player (free versions available)

3) NVDA Reader (free versions available)

1

Volkswagen’s Defeat Devices and Stakeholder Control

Today, E P A is issuing a notice of violation (N O V) of the Clean Air Act (C A A) to Volkswagen A G, Audi A G, and Volkswagen Group of America, Inc. (collectively referred to as Volkswagen). The N O V alleges that four cylinder Volkswagen and Audi diesel cars from model years 2009-2015 include software that circumvents E P A emissions standards for certain air pollutants.

—U.S. Environmental Protection Agency, 9/18/2015

Announcement resulted in the loss of 30% of the company’s market value.

Volkswagen and Diesel

Volkswagen was founded in 1936 in Germany. By 2015 Volkswagen Group was a multinational holding company of car and truck products and had become the second largest automobile manufacturer in the world.

When Martin Winterkorn was appointed C E O in 2007, he had given specific instructions: triple sales in the U.S. to 800,000 cars by 2018. His strategy was diesel.

Diesel Engines (1 of 2)

Diesel engine exhaust had lower carbon monoxide production, but higher particulate and nitrogen oxides emissions.

U.S. emissions restrictions on passenger automobiles were the most stringent in the world.

Diesel Engines (2 of 2)

There were two basic technologies used to reduce N Ox emissions:

Selective catalytic reduction (S C R)

Lean N Ox trap (L N T)

S C R was most effective, but V W concluded it was too expensive and added too much weight.

L N T was cheaper and lighter, but less effective, than S C R. It was this technology that V W employed in the vehicles equipped with defeat devices.

Detection (1 of 2)

In 2013, a small nonprofit clean air group in Europe, in an attempt to verify and defend the environmental benefits of V W’s clean diesel technology, sponsored a contract to conduct emission tests on several V W models under California driving conditions. The findings of that study revealed that two V W models did not pass the emissions tests. California authorities raised their concerns with V W management.

C A R B [California Air Resources Board] shared its test results with V W on July 8, 2015. C A R B also shared its results with the E P A... During a meeting on September 3, 2015, V W admitted to C A R B and E P A staff that these vehicles were designed and manufactured with a defeat device to bypass, defeat, or render inoperative elements of the vehicles emission control system.

Detection (2 of 2)

The defeat device was essentially software to determine if the automobile was being tested for emissions.

If it was, it altered the combustion to allow more fuel to pass through combustion and therefore reduce N Ox emissions.

The September announcement by C A R B/E P A resulted in an immediate sell-off of V W shares. As illustrated in Exhibit A, V W’s share price began to plummet.

V W estimated that the defeat device was onboard 11 million cars sold worldwide. The C E O was replaced and 11 million vehicles were recalled.

Exhibit A Volkswagen’s Share Price, March 2015-May 2016

For long description, see slide 21: Appendix 1

Corporate Culture

V W had long been known for its command and control culture; it was purportedly an organization in which subordinates were afraid to question their superiors.

Critics of V W often cite its “culture of arrogance,” in which the organization believes it is not accountable except to itself.

V W’s management culture, called the V W System, functioned via a network of deep relationships between management, workers, local politicians, and a very difficult and frequently torrid family ownership structure.

Although a global organization, its deep roots in Lower Saxony assured corporate longevity by protecting the jobs and industrial structure of its constituents. Often referred to as stakeholder capitalism, it had proven good for stakeholders but less than optimal for shareholders.

Power and Governance at V W (1 of 3)

V W did not have a single Board of Directors; instead it had two separate boards common under German corporate law:

Supervisory board expected to oversee management

Management board expected to oversee the day-to-day activities of the company

As illustrated in Exhibit B, board seats, ownership, and power were three different concepts at V W.

Ultimately, the supervisory board controlled V W.

Exhibit B Volkswagen’s Governance Structure

For long description, see slide 22: Appendix 2

Power and Governance at V W (2 of 3)

The Porsche and Piëch families owned 32% of the company, Lower Saxony 13%, Qatar 16%, and the remaining 40% was held by outside investors through the free floating shares (traded on exchanges).

But the ownership of shares did not translate directly into votes. The Porsche and Piëch families held 51% of the votes in the company.

The Supervisory Board had four committees: audit, nomination, mediation, and presidium. It was the presidium, the executive committee often referred to as the inner circle, that held the power.

Power and Governance at V W (3 of 3)

V W’s corporate governance employed a common control device in Europe, the pyramid structure.

Pyramid structures involve an entity (such as a family or a company) to control a corporation that, in turn, holds a controlling stake in another company.

V W, at the time of the crisis, was effectively controlled by three men: Ferdinand Piëch, his cousin Wolfgang Porsche, and Martin Winterkorn. Although Winterkorn was now gone, the new C E O, Matthis Müeller, was a close associate of Piëch.

The Piëch and Porsche families had an official agreement to unite their voting power.

V W’s 2016 Mixed Message (1 of 2)

On January 4, 2016, the U.S. Department of Justice filed a civil complaint against V W alleging the illegal installation of emissions defeat devices and importing vehicles into the U.S. violating the Clean Air Act.

V W’s response was to refuse to provide any communications among its executives to legal authorities in the U.S. on the basis of corporate privacy protection under German law. Germany had some of the most stringent legal protections on personal information in the world, particularly as provided to entities outside the E U.

V W’s 2016 Mixed Message (2 of 2)

Although V W admitted it did indeed commit illegal acts in the U.S. (technically by lying to government regulators, not for installing the devices), the company noted that the device “is not a forbidden defeat device” under European rules.

Although critics of all kinds were impatient with V W to disclose the results of its internal investigations, V W’s leadership continued to argue that it was obligated by German corporate law to inform its shareholders first, and that could not happen prior to the April 2016 shareholder meeting.

Changing Story (1 of 3)

The responsibility of leadership to divulge significant risks to a publicly traded company’s shareholders in a timely manner was clear in both Germany and the United States.

V W now reported that C E O Winterkorn was sent memos noting the issue more than a year before the issue arose publicly but he may not have read them.

Many insiders argued that V W’s leadership did not understand that the defeat devices actually broke U.S. law, and believed that resolution would be achieved relatively easily and quickly with U.S. regulators.

Changing Story (2 of 3)

Volkswagen considers the German shareholder lawsuits to be without merit, since any ad hoc disclosure obligation requires that the persons responsible for the fulfillment of this obligation obtain knowledge of facts relevant for the stock price and can assess the economic effects of those facts. With respect to the diesel matter, stock price relevance occurred only as of 18 September 2015 when the violation of U.S. environmental regulations was announced. Until then, there were no indications whatsoever of information with relevance for the stock price, since up until that point in time it was expected that a manageable number of vehicles (approximately 500,000) would be affected by the diesel matter and that fines in a two-digit or lower three-digit million amount would be imposed, as had been the case in the past in the U.S. in comparable cases involving passenger vehicles.

Additionally, to the best knowledge, the diesel matter appeared to be an issue that could be contained by measures that were common in such cases, including effective technical solutions, and, thus, appeared to be neutral with regard to the Company’s stock price.

-V W press release to investor lawsuits

Changing Story (3 of 3)

This was followed by a 113-page interim report from its own ongoing internal investigation, in which V W noted that it had been surprised by the issue being taken public by U.S. regulators.

The company had assumed that continuing negotiations would follow the September findings, privately, to reach a resolution. In the past, even in the case of so-called defeat device infringements, a settlement was reached with other car-makers involving a manageable fine without the breach being made public.

The now ex-C E O of V W, Martin Winterkorn, had opened the company’s 2014 annual report to stakeholders with the corporate vision, a vision that now sounded increasingly hollow.

Mini-Case Questions

Why did Volkswagen’s leadership decide to use defeat devices?

Who controls the strategic and operating decisions at V W?

Describe the various stakeholders and their individual interests in V W. Whose interest dominated in the decision to pursue the defeat device strategy?

How did V W react to the discovery of its deceit? Do you think this was the proper crisis management response? What would you recommend that they do differently-next time?

Copyright

This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.

20

Appendix 1

Long Description for a graph plots Volkswagen’s share price in euros versus time for the period from March 2015 to May 2016.

The graph consists of a curve representing the following trends in Volkswagen’s share price. The share price generally fell from around 235 euros on March 24, 2015 to 165 euros on September 18, 2015. On this date, the U S E P A announced a notice of violation. The share price then dropped to near 100 euros by early October 2015. Over the period from October 2015 to May 2016, the stock price continued to fluctuate between 100 and 140 euros, rising to near 130 euros by May 2016. All values estimated.

Return to presentation

Appendix 2

Long Description for Volkswagen’s governance structure.

The diagram explains Volkswagen’s governance structure. Volkswagen’s governance structure begins with the Supervisory Board. The Chairman of the Supervisory Board alternates between the Works Council and Shareholders. The Supervisory Board oversees the Management Board headed by the Chief Executive Officer, C E O and Chairman of the Management Board. The Supervisory Board has two components: the Works Council and Shareholder Interests. The Works Council has 10 seats, and Shareholder Interests have 10 seats. The Porsche and Piëch Families have a formal agreement to vote their shares as one. The following table provides the number of board seats, percent ownership, and number of votes for each Shareholder Interest.

A table has 5 rows and 4 columns. The columns have the following headings from left to right. Shareholder, Number of Board Seats, Percent Ownership, Number of Votes. The row entries are as follows. Row 1. Shareholder, Porsche and Piëch Families. Number of Board Seats, 4. Percent Ownership, 32. Number of Votes, 51. Row 2. Shareholder, Lower Saxony. Number of Board Seats, 2. Percent Ownership, 13. Number of Votes, 20. Row 3. Shareholder, Qatar Investment Holdings. Number of Board Seats, 2. Percent Ownership, 15. Number of Votes, 17. Row 4. Shareholder, Outsiders Appointed. Number of Board Seats, 2. Percent Ownership, blank. Number of Votes, blank. Row 5. Shareholder, Outside Investors, free float. Number of Board Seats, 0. Percent Ownership, 40. Number of Votes, 12.

Return to presentation

.MsftOfcThm_Text1_Fill { fill:#000000; } .MsftOfcThm_MainDark1_Stroke { stroke:#000000; }

Case Discussion Rubric

Page 1 of 2

Outstanding

100 points

Good

85 points

Average

75 points

Limited

65 points

Flawed

55 points

Demonstrates

Careful Reading

and Inquiry into

Subject

Discussion Post

• Shows serious contemplation of

readings.

• Shows original thought that goes

far beyond the

obvious.

Discussion Post

• Indicates reading was

completed.

• Addresses some of the questions

obvious answers.

Discussion Post

• Relies primarily on case summary

Discussion Post

• Suggests case scanned but not

read carefully

• Rehashes ideas from other posts

Discussion post

• Gives little indication that the

case was read and

assignment

completed.

• The Post was not relevant to the case

questions or current

discussion.

Responsibly cited

and provides

examples

Quotes used: • support writer’s

point (“proves”

it) • are original

(unexpected

quote choices

and/or uses

quotes from

multiple

places of the

text) • properly

integrated into

the discussion

• Properly

punctuated

Quotes used: • support writer’s

point (“proves” it) • are somewhat

predictable • are not well

integrated into

discussion

• some mechanical and/or

documentation

errors

Some quotes are

used, but: • There are too

few examples;

relies mostly on

generalization s • Some quotes do

not effectively

support writer’s

point • quotes are poorly

integrated

• citation errors • Diction is

ordinary

Some quotes are

used, but: • Paraphrase

dominates • quotes used are

not integrated • Quotes do not

make sense as

support • Quoted

material is out

of context

• Fails to use

capital letters or

punctuation

No quotes are used;

textual evidence

(even paraphrased

evidence) is flimsy

and/or

inappropriate • Citations are

missing

Case Discussion Rubric

Page 2 of 2

• Quotes are

properly cited.

• Contains multiple

documentation errors

Outstanding

100 points

Good

85 points

Average

75 points

Limited

65 points

Flawed

55 points

Engagement with

Others • Shows concerted

and honest effort

to engage

with others • Responds to

ideas in a way

that advances

discussion

beyond the

obvious • Interacts

easily &

accurately

with other

posts in the

thread

Responds in the

way highlighted

above at least 5

times.

• Shows attention

to other posts in

the thread • Incorporate s and

acknowledges

ideas

of others in

attempt to

advance the

discussion

(perhaps

in predictable ways)

Responds the way

described above 3-4

times.

• Offers little

interaction

with other

posts in the

thread • Mostly

summarizes

what others

have said

without adding

to discussion

Responds in the

way described

above 1-2 times.

• Does not

acknowledge

blog15

Get help from top-rated tutors in any subject.