Case Study 4

Review the following case study:

Prime Emerald Inc. is an upscale rug manufacturer in Flint, Michigan. Prime Emerald has now begun exporting rugs to a major antiques retailer in Australia, but the retailer has yet to confirm a fixed amount of rugs to purchase nor has Prime and the retailer agreed on a fixed priced for the rugs. Remember, China is the primary export point for Prime because of the reasonable costs the rugs will have to be exported out of the China warehouse as well as the overstock in the U.S. warehouse. The rugs coming that are manufactured and coming from the U.S. will cost normal pricing, but the rugs manufactured and coming from China must be denominated in the Yen currency. Consider yourself as a consultant to Prime Emerald on their international affairs. You have brought concern to the CEO that the sales in antiques has declined in Australia in close areas to the retailer, you have also mentioned that the area in which the retailer resides, consumer spending has decreased by 20% and the town is experiencing inflation. Among all factors you have mentioned, it has been known that the Australian dollar has experienced extreme depreciation because of current economic conditions. Prime despite your findings truly does believe that the Australian retailer will bring other business and the potential for growth when the currency starts to appreciate again will prove bigger business for the retailer and infrastructure.

In 1 to 2 pages:

  • Explain Prime Emerald’s potential economic exposure to Australia.
  • Explain whether Prime will experience transaction or translation exposure and explain your rationale.
  • Thoroughly explain how Prime Emerald will be affected by the inflation that has existed and recommend what hedging techniques you feel Prime should use to make sure they are not affected by the many changes of Australia and its economy.
  • Use APA formatting for any citations and reference page.