Rent-A-Centre Enters China

Summarize the business that you have chosen, and provide a two to three (2-3) paragraph justification as to why China would be a viable market for the selected business.

There are a number of rent-to-own operators in the United States but none of these beats Rent-A-Centre. Weighing the market share by stores, this firm has a market share of above thirty percent. By June 30th 2014, Rent-A-Centre was employing around 19,000 people. It is a Texas based firm that was hatched in 1986 going public ten years later through the NASDAQ. Its stock market symbol during its public market entry was ‘RCII’. The firm was an instant hit growing significantly over the first month. By the end of the first month the firm was seeing operation of over 3,000 stores in the United States and other neighboring countries such as Mexico, Puerto Rico and Canada. By this time, the firm was operating around 200 1,350 kiosks in the US and Puerto Rico alone. They also had 180 rent-to-own franchises that they operated under Rent-A-Centre, Rim Tyme and Color Tyme names. The firm and any other trade name associated with it are leasers. They specialize in rent-to-own lease of household goods (Rent-A-Centre, n.d.). Rent-A-Centre’s operations are segmented into four units. These are, Core US, International, Acceptance Now and Franchising. Among the durable products in their stock are electronics and electrical appliances; furniture, computers, music and games equipment among other accessories all availed to the customers under rental acquisition agreements and sales by installments. For people willing to obtain their products but have no qualifications for traditional retailer financing, Rent-A-Centre a center comes to their rescue with rent-to-own(Rent-A-Centre, n.d.).

China is a very strong economy and home to more than 1.37 billion people. Around 150,000,000 section of this population have a daily earning of above $100 and this is expected to rise as the country improves its economy (Murray, 2014). Many researchers predict that over the next 15 years the country is expected to gain middle class status as a country, therefore,this justifies the suitability and potential success of Rent-A-Centre in that country. There are many things happening to that economy that are making business easy. These include tax incentives and the cropping of some legal restrictions that were challenging to businesses. Labor is cost effective and readily available therefore confirming a very good market for the firm where it could also manage to lower prices and still be profitable (Murray, 2014).

Examine the exchange rate of the U.S. dollar and the Chinese Yuan for the last 24 months. Explain the major overall changes that have occurred and speculate on the key economic variables that most likely have influenced the exchange rate movements. Provide a rationale for your response.

Over the last 24 months, there has been a lot of volatility experienced in the Chinese Yuan in relation to its trading and value against the US dollar. In 2014, August 19th, 6.14 Yuan were being exchanged for one US dollar something that has seen interchangeable changes over the time showing a gain by the Chinese Yuan sometimes and a drop on other days (Chen & Goo, 2015). This calls for proper exchange rates evaluation or analyzing when thinking of an investment in China.  A company would be financially advantaged if it makes investment in the country when the US dollar is in a strong position as compared to Chinese Yuan. China has experienced a couple of economic challenges over the past few years but this has not dimmed their growth hopes as they have been able to achieve 7.5% growth in 2013.Fortunately, the current government has put in place measures and reforms meant to make the economy more competent by bringing stability in growth and enhance consumption. Economic growth promoted by private consumption rather than fixed investment is what the Chinese government is trying to achieve (Chen & Goo, 2015). This will help bring in place a middle class population that will favor stable economic empowerment in the next fifteen years. Investing immediately will help create strong links with the community therefore enabling a firm enjoy the market and the current changes. Entering the market will enable the firm build a strong brand and actualize a favorable market share. Rent-A-Centre is based on a very ideal business model meant for providing needed goods and services that the middle class growth will require. The Chinese Yuan price will gain value over the next few years making it more marketable (Chen & Goo, 2015). This is evidenced by the fact that a number of countries have already started converting their reserves in foreign currencies to the Yuan. This is in anticipation to the expected strength gain by the Chinese Yuan.

Analyze the major exchange rate risks associated with transaction and translation exposure within the Chinese market. Based on what you have gleaned from your analysis, predict the major changes that you believe will occur in the next 24 months. Justify your response.

Remittances, Course capital flows, FII, FDI, and service exports are some of the things China’s BPO is dependent on. It is vital that banks and all other intermediaries in the market be given the chance to oversee scientific management of risks in the Forex. Hedging of core exposures of foreign exchange is the principle for foreign exchange access in domestic markets (Allen, et. a.l.,2015). There has been an addition of newer facilities to the traditionally available facilities like forward contracts booking resulting from the new domestic markets and gained volumes and depths in forex markets. Among the new hedging tools are swaps andadditions included in forwards in foreign exchange (Allen, et. a.l.,2015). It cannot be forgotten though that crystallized foreign currencies were the only exposures hedging was permitted against. This means that hedging or cover was only allowed when there was a forex risk resulting from legitimate transactions for example in import. Hedging extensions will have a positive impact on trade in China (Allen, et. a.l.,2015).

Recommend key steps that the chosen MNC could take in order to mitigate or eliminate exchange rate risk. Suggest one (1) method that the MNC in question could use with derivatives in order to mitigate, or eliminate such risks. Provide a rationale for your response

The spot FX market remains to be the most extensive market worldwide seeing over a trillion dollars in daily trade. This large market’s main derivative is the futures market that accounts for one hundredth of the entire market. Forex derivative is based upon hedging and speculating as the main tools for the market (Tang, 2015). Hedging specialists in this market will shield themselves from changes in prices in future using the forex contracts futures, which help them do away with or reduce the risks.Speculating on the other hand will involve taking risks with aiming for profits (Bodnar, 2014). There exists a very slight difference between spot FX and futures in FX market. This raises the question why one would rather go for opportunities of trade in futures rather than the spot market. There are a number of advantages and disadvantages that come with trade in futures markets’ forex financial contracts. Among the advantages of the futures market is lower costs in transactions, lower spreads and increased leverage. The leverage is usually equal to $500 or more on a contract. The main disadvantage of futures market is the required capital amount. Other disadvantages include limitations to sessions in foreign exchange and the applicable fees (Bodnar, 2014).

The strategies applied in speculating are much like those in spot markets. The most common strategies employed in derivatives for foreign currency use analytical charts. The technical charts are effective because FX markets are trend-able. Speculators in the also use a very elaborate strategy known as arbitrage (Bodnar, 2014). There are a number of reasons that justify the use of hedging as a strategy in futures market. Its main aim is to reduce the effect fluctuations of currency will have on revenue from sales. E.g. when an international firm tries to analyze the income to be generated from stores based in Europe in dollars they can purchase a futures financial contract (Forex). The contract value will be the same amount as the projected sales with helps curb the impact resulting from fluctuations in currency (Tang, 2015).

During the hedging process, a trader in FX will usually have to make a selection between futures and a couple of other derivatives of foreign currency known as forwards.  There are differences between forwards and futures but the main one is that in forwards there is more flexibility in terms of dates and contract size selections (Bodnar, 2014).  There other one is that for the amount backing a forward to be paid the contract’s expiration date must have been reached. As for the futures, there is daily accounting and calculation of the amounts generated.

Recommend one (1) hedging technique geared toward managing the economic, transaction,and translation exposure in the Chinese market. Justify your response.

Transaction exposure risks

There is a timeframe that a transaction takes. This is the time between sales of goods and the time payment is received. A firm may sell goods to a foreign firm or user and expect payment after two months. During this duration there may arise fluctuations of either currency therefore contributing to gain or loss by either of those parties involved in the transactions depending on who gets favored by the fluctuation (Tang, 2015).  Such transactions may be imports or exports on credit basis, foreign currency investment, borrowing or dividend receipt from a foreign source. Hedging tools are an effective way of shielding such exposure.

Translation exposure risks

A firm with more than one subsidiary in different foreign locations needs to unite all the financial results resulting from all of those operations. This exposure will have an effect on the group’s finances when the income, assets and liabilities of the group are translated from foreign currencies to the home currency (Randau&Medinskaya, 2014). To shield the group from translation exposureit uses balance sheet hedging. During balance sheet hedging an offset match of the assets and liabilities is done to lower the translation net effect. A company may want to lower their assets dominated by foreign currency if they predict that the foreign currency they are based on might lose value. They may also at the same time seek more loans and slow payment of creditors to increase liabilities locally.By equating their assets in foreign currency with liabilities in local currency they are safe from changes in exchange rates exposures.

Economic exposure

The effect of this type of exposure is felt on the value of the entire firm. Severe fluctuations or changes in exchange rates will cause a reduction in future cash flows’ present value. This lowers overall company value. It is worth noting that the value effect of a dollar on a company is hard to measure. For example in a case where a firm from China is doing business in a foreign country via a subsidiary, when that country’s currency devalues then there is a negative effect on the home firm (Tang, 2015). The reason is because the profit earned will lose value when it is sent back to China. As for the subsidiary, the situation favors them; it would be a profitable time if they exported goods to foreign countries. Where an international firm manufactures all products in a certain country and the country’s currency gains value then they will find their exports expensive to other foreign countries. Their sales therefore fall therefore reducing their cash flow as well as the firm’s value. The case is different for a firm that has productions and buys inputs from all around the world.  The possibility of all those countries’ currencies revaluing at the same time is minimal if not null. This therefore means they will not lose from all production facilities (Tang, 2015).

Risks in foreign exchange need to be considered when borrowing from different currencies. When a firm undertakes borrowing based on US dollars they have to ensure liability is settled using the same currency (Randau&Medinskaya, 2014). A gain in value of the US dollars as compared to home currencies this will result to expensive interest rates and principals. Borrowing spread over different currencies is safe because of the unlikelihood that the currencies will gain or lose value at the same time therefore reducing the economic risk exposure (Randau&Medinskaya, 2014). It is therefore justifiable that a firm obtains foreign currency loans if the payments of principals and rates will be made used money earned using or from that currency.

Conduct a country risk assessment to ascertain whether or not management should support the proposal for your chosen MNC to enter into the Chinese market. Based onGeert Hofstede’s six (6) dimensions of culture, predict three (3) likely problems posed by the cultural differences between the chosen MNC’s culture and the Chinese culture. Provide a rationale for your response.

Communication in this case will be a problem if one does not speak Mandarin. Mandarin is China’s official language though there exist a few variations in different regions. Most people in China do are not English speakers and therefore there is a need to bring along an interpreter. Phones and web sources of information and communication are available though they cannot be relied on as sources of information and means of communication in this region (Berg, 2015). There is reasonable growth seen in the private sector but in some areas competition remains strong especially posed by firms financed by the state. Trading using US dollars in this region is possible but the risks posed by exchange rate fluctuations are prevalent and the hardships that come with Chinese currency exchange in foreign countries complicate the issue further. Therefore, currency issues, competition and communication remain as some of the main challenges. Politically, there is tension in social circles brought about by the target of land for agriculture by developers who are benefiting from the lands acquired through confiscation. In 2012 there were municipal elections resulting from pressure and incitement of the Wukan villagers (Randau&Medinskaya, 2014). This is a great example of social factors that would affect business in the region. Another issue is the disparity in terms of infrastructure and economic development between urban and rural areas. There is a lot of issues in governance relating to the accessibility of balance sheets especially in the corporate sector. The measures that have made it harder to access companies’ financial information remain to be a central concern as it has a direct impact on credit sales. Experts are clear on one thing; China’s economy will continue to grow despite everything. China therefore remains a very good region to invest in (Berg, 2015). A firm just needs to take a proper research of the region understanding the various challenges and risks in that country and more specifically in the industry the business wishes to venture and put in place measures to neutralize the risks. With these evaluations and measures in place a company will successfully gain and grow with the economy as it grows to be among the three largest economies in the world.


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