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July 14, 2013

Custom Research Paper Sample on International Revenues and Costs

Johnson & Johnson

Johnson & Johnson is a global American  goods manufacturer founded in 1886, The products of  the company are pharmaceutical, medical devices  and consumer packaged. They sale these products in different countries and price their products in the local currency of the country in which they operate.
Every day, millions of people around the world enjoy the benefits of products from the Johnson & Johnson Family of Companies.
The two activities of the company is given below in its some of activities.

1)      Affinity Groups: Affinity groups are voluntary, employee-driven groups that typically focus on a shared interest. These groups provide support and networking opportunities such as mentoring, community outreach, career development and cultural awareness activities.

2)      Mentoring Programs: Many Johnson & Johnson companies offer formal or informal mentoring programs to expand opportunities and support development of a diverse workforce. A number of our affinity groups offer programs that match up new members of our work community with experienced leaders who serve as mentors.
Company uses the foreign currency to pay the employees and to price the products. Normally firm that owns a fixed capacity of a resource that is consumed in the production or delivery of multiple products. The firm strives to maximize its total expected revenues over a finite horizon, either by choosing a dynamic pricing strategy for each product or, if prices are fixed, by selecting a dynamic rule that controls the allocation of capacity to requests for the different products.
Exchange rate volatility can work against an international company if a payment in a foreign currency has to be made at future time as future rate is unpredictable. There is no way to guarantee that the price in the currency market will be the same in the future. It is possible that the price will move against the company, making the payment cost more. On the other hand, the market can also move in a business' favor, making the payment cost less in terms of their home currency. So it depends on the currency rate of the country where the MNE’s operate.
Generally, company that operates in other countries benefit when their home currency depreciates, since their products become cheaper in other countries. Company cost more when their currency becomes stronger in the country but benefit in other countries the operate.
Business owners with commercial ties to countries experiencing major changes in their economies are even more vulnerable to currency rate risk. An example of a risky currency is the Japanese Yen. A rocky economic recovery in Japan and Japanese restrictions on capital outflow makes the dollar-yen rate very volatile.

If an export/import company conducts business in a volatile market, it is exposed to a higher degree of currency rate risk. Sudden changes can be disastrous for a company that does not plan ahead by detracting from its bottom line.

The exchange rate expresses the national currency's quotation in respect to foreign ones.If the exchange rate of the Japan improves then it will reduce the profit of   the company as company will get will less revenue in terms of dollar, production cost of the company would increase too.
Above table is showing the improvement in the dollar as compare to the yen.
Forward and futures markets are used to accomplish the objectives of hedging, speculation, and trading. Forward contracts occur between large entities, while futures contracts involve any size entity (for example, individuals, small firms, or large firms). Forward market trading occurs over the counter or via the telephone, whereas futures trading takes place on a physical exchange, such as the International Monetary Market in Chicago. Contract sizes and delivery dates are negotiable in the forward market, and standardized in the futures market. Traders earn the bid/ask spread in the forward market, while they earn brokerage commissions in the futures market. Finally, contract settlement occurs on the expiration date in the forward market and daily (that is, mark to market) in the futures market.
Firms have four options when it comes to managing exchange rate risk. They are: do not hedge, hedge using forward or futures contracts, hedge using money market contracts, and hedge using option contracts. If they decide to hedge, then, the choice is among forward/future contracts, money market contracts, or option contracts. Each of the hedges will accomplish the goal of eliminating exchange rate risk. Forward/futures and money market contracts, however, lock you in so that you cannot take advantage of favorable changes in the spot market. For example, if a firm hedged accounts payable using a forward contract and the applicable foreign currency depreciated in value, the firm could not take advantage of it, as they are locked into the forward contract. The advantage of option contracts is that they do not require that you exercise the option. Depending on changes in the spot rate, the firm can either exercise the option or let it expire, and then take advantage of favorable movements in the spot market.
Hedging Against Currency Risk to Avoid the Volatility Trap:
There are some measures which could be taken to avoid the volatility;
One way is to avoid the risk by minimizing their commercial involvement with countries that have volatile currencies like the Japanese Yen. This is however not a practical solution. Another way is to hedge in the spot currency market by taking a position that effectively neutralizes the volatility in the pair

Hedging Against Volatility
So how can a business protect itself against currency volatility? One risk management tool that can help a business protect its profits from unforeseeable changes in the currency market is hedging. The primary goal when hedging is to protect your company's profits from exchange rate uncertainty at the lowest possible cost.
How to hedge against risk exposure
Individuals and businesses can easily reduce exposure to currency risk by taking positions in the spot currency market. For example, if a US company doing business with the UK wants to protect itself against a depreciating dollar, then the appropriate hedge would be to short dollars and go long pounds in the spot currency market. By using a trading account, the business can customize the amount of leverage it uses, (all amounts up to 100:1*) so that even a perfect hedge is possible at a very low cost.
*Without proper risk management, a high degree of leverage can lead to large losses as well as gains

For instance: an American importer is expecting a shipment of 380,000 pounds sterling worth of British goods in four months. To pay his supplier, he will need to convert dollars to pounds.

Because he will not be making payment until the goods are delivered, there is a risk that the dollar may decline and make purchase more expensive. There is also a chance that it would appreciate and make the transaction cheaper, but the importer prefers to enter a hedge to avoid the risk of having to pay more in the future.

To hedge his risk, he buys 380,000 pounds in the currency market. If the pound appreciates (and consequently the dollar depreciates), he will profit in his trading account-and completely offset any losses he would have incurred by converting at the end of the four months.
An additional source of revenue

Of course, exchange rate movements can also provide opportunities to make additional revenues by taking positions in the currency market. The same market volatility that makes hedging necessary when doing business can also be used to make up for lost revenue when currency prices make your product more expensive abroad, for example.
Cost increases means there is decrease in the profit as the exchange rate is a conversion factor for the Johnson & Johnson. Affect could be minor in terms of whole profit of the company but makes the difference in Japan for the company profit.
Currency Rates per 1.00 US Dollar
Exchange rate as per 12/08/2010
                                                                     12/07/2010    12/08/2010

In case if the yen appreciates then it would decrease the value of dollar. For example, if one US dollar is worth 10 000 Japanese Yen, then the exchange rate of dollar is 10 000 Yen. If something costs 30 000 Yen, it automatically costs 3 US dollars as a matter of accountancy. Appreciation in the yen will decrease to less than a dollar. If company had to pay its employees 1000 million yen to the employees then it would need more as the exchange rate is high than the previous rate . When the profit will be calculated in terms of dollar then it would have been decreased as compare to previous.
Similarly it will have adverse affect when the value of yen depreciates. It will reduce the cost this time and increase the profit.  

Joern Meissner (2006). Dynamic Pricing Strategies for Multi-Product Revenue Management


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