University of Aberdeen
Balance of advantages of the UK joining the EMU and/or using the Euro as a functional currency.
1. EXECUTIVE SUMMARY 3
2. INTRODUCTION 3
2.1. HISTORY OF INSOMNIA PLC 3
2.2. SCOPE OF BUSINESS 3
2.3. CURRENT EXPOSURES 4
2.3.1. TRANSACTION EXPOSURE 4
2.3.2. ECONOMIC EXPOSURE 4
2.3.3. TRANSLATION EXPOSURE 4
2.4. HEDGING 5
3. EFFECTS OF UK JOINING EMU ON INSOMNIA PLC 5
3.1. COST SAVINGS ON CROSS-BORDER TRANSACTIONS 5
3.2. STABILITY OF PRICES 6
3.3. ...view middle of the document...
Further 3 countries including United Kingdom, Denmark and Sweden did not join the EMU even though they had an option to do so. Main reason for the UK not to join the Euro was the strength of the Pound and the British economy against the countries in the Euro zone. Joining EMU was predicted to cause economic problems in the country as European Central Bank would seize full power over the monetary policy in the UK including for instance setting benchmark interest rates. Economists are therefore divided into two groups: pro and cons the EMU. Aim of this report is to show on the example of invented for the purpose of the report Multinational Corporation (Insomnia plc) the influence of UK joining the EMU and/or using Euro as a functional currency.
3.1. HISTORY OF INSOMNIA PLC
Insomnia plc is a UK based Multinational Corporation with their headquarters in Aberdeen, Scotland. The company was founded in 1987 by Mira Stavika. Insomnia designs, produces and sells luxurious clothing, shoes and accessories for adults and kids. The company has internationalized through subsidiary undertakings in Italy, Spain, Germany and France as well as international trade with India, where the clothing is manufactured and exported to UK. The special packaging for cloths is produced in Slovakia. Since 2001, the company is listed on the London Stock Exchange and the largest German stock exchange in Frankfurt (FWB Frankfurter Wertpapierborse). The corporation owns approximately 60% of each subsidiary.
3.2. SCOPE OF BUSINESS
After importing clothing to the UK, Insomnia stores it and resells majority part of it to their subsidiaries at the 20% mark-up. The remaining part is being sold in the UK. Subsidiaries and parent trade the clothing in the Insomnia branded shops. Apart from the payments for the import of clothing, foreign entity has to pay to its UK parent the management fee for the administrative and managerial services it provides. Out of the profit the foreign entities obtain, 70% is re-invested in their business; the remainder is paid to shareholders in form of dividends. Almost 40% of Company’s debt is denominated in Pound Sterling where the remaining part (60%) is in Euro. Revenue of the company comes in 70% from Euro and 30% from UK braches in Pound Sterling.
Parent company uses Pound Sterling as a functional and reporting currency, whereas all of the subsidiaries occupying in the Euro zone, use Euro as a functional and reporting currency.
3.3. CURRENT EXPOSURES
Insomnia plc trades mainly in the foreign markets. This exposes the company into a series of uncertainties mainly regarding the exchange rate of the currencies. Exchange rates cannot be predicted with the ideal accuracy, but companies can at least forecast their exposure to exchange rates fluctuations which comes in three types.
3.4.1. TRANSACTION EXPOSURE
Transaction exposure is the degree to which the short–to–medium term cash flows denominated in foreign currencies...