Universal Circuits' Case Assignment
Does the Universal Circuits’ Irish controller have a convincing argument for the weakness of the dollar? Why or why not? How would you interpret the evidence? The controller of the Irish division does have a valid point when stating that the U.S. dollar is in a vulnerable position due to the fact that its trade deficit is currently in excess of $100 billion and growing. (see Exhibit 1). While Universal Circuits’ chief financial officer, Joe Merrill, is correct when stating that the dollar is in the middle of its twenty-year range, he never mentioned which countries currency he was comparing it to. When compared to the Irish punt, which the controller and the company have a vested interest in it is clear that over the last …show more content…
The controller of the Irish plant estimated that the profit margin was highly vulnerable to any weakening of the dollar against the Irish punt. This being said, the request to buy Punt forward should be approved. There are multiple considerations that should be factored into the decision. For instance, if the US dollar does not in fact depreciate, then hedging techniques become extremely costly, ineffective, and inefficient. It must be noted that if Purchasing Power Parity does hold, then the US dollar will indeed depreciate against the punt. Therefore, buying the punt forward is an excellent strategy to hedge to maintain Universal Circuit’s profits.
Further evidence from Exhibit 1 shows that for the United States:
• Consumer prices have increased from 74 in 1977 to 126 in 1984
• Industrial prices have increased from 71 in 1977 to 118 in 1984
• Gross domestic product in 1980 Prices have increased from 93 in 1977 to 104 in 1983.
• Trade balance deficit almost doubled from $31billion in 1977 to $61 billion in 1983.
• Government deficit almost quadrupled from $51 billion in 1977 to $190 billion in 1983.
• An expansionary monetary policy is used by increasing the money supply from 81 in 1977 to 132 in 1984.
Due to the expansionary position taken, the real interest rate will temporarily drop and there will be an upward pressure on the domestic price and inflation will