Question

3. What is a “euro-euro” deposit?

4. Contrast foreign bonds and Eurobonds

6. Define market segmentation and explain its causes. What are the main advantages and disadvantages for a firm to be in a segmented market?

9. A US firm borrows yen at 4% for one year. The current spot exchange rate is 100yen/$ but is expected to change to 110yen/$ during the year. What is the expected dollar cost (in percentage) of the yen borrowing?

10. *The US firm borrows euros at 5% for one year. The spot exchange rate is 1.4$/euro, and one-year forward exchange rate is 1.35$/euro. What is the exchange risk-covered dollar cost of (in percentage) euro borrowing?

Answer 1

1) A euro deposit is a deposit of foreign funds into a bank that operates within the European banking system. These banks function on the consolidated European currency—the euro. When an external investor deposits foreign currency into one of these banks, they are effectively depositing in euros.

2) A Eurobond is simply a bond that is issued in a currency that is different from the main currency in the country or market that it was issued in. For example, a bond that is written in U.S. dollars but issued in a foreign country is a Eurobond, even if the bond was not issued in Europe. Most Eurobonds are issued in U.S. dollars or Japanese yen, and Eurobonds make up about 30 percent of the global bond market.

A foreign bond is issued by a foreign entity in a certain country, issuing the currency of that country. For example, a company from Asia can issue a foreign bond in Great Britain, and the bond will be issued in British pounds.

3) Market Segmentation is a process of dividing the market of potential customers into different groups and segments on the basis of certain characteristics. The member of these groups share similar characteristics and usually have one or more than one aspect common among them. There are many reasons as to why market segmentation is done. One of the major reasons marketers segment the market is because they can create a custom marketing mix for each segment and cater to them accordingly.

Causes:

• Better matching of customer needs
• Enhanced profits for business
• Better opportunities for growth
• Retain more customers

Advantages and Disadvantages of Market Segmentation!

Advantages of Market Segmentation:

(i) The marketer can spot and compare marketing opportunities. He can examine the needs of each segment and determine to what extent the current offering satisfies these needs. Segments that have a low level of satisfaction from current offerings represent excellent opportunities for the marketer.

(ii) With the help of knowledge about different segments, the marketer can better allocate the total marketing budget. Differences in customer response to different marketing tools serve as the basis for deciding on the allocation of market funds to different customer groups.

(iii) The marketer can modify his product/service and marketing appeals to suit the target segment.

(iv) Segmentation facilitates setting up of realistic selling targets and priorities.

(v) Management can identify new profitable segments that deserve special attention.

(vi) It is possible to deal with competition more effectively by using resources more effectively.

(vii) Appropriate service packages can be developed for each market segment.

Disadvantages of Market Segmentation:

Market segmentation suffers from the following disadvantages:

(i) Segmentation increases costs. When a firm attempts to serve several market segments, there is a proliferation of products. The cost of production rises due to shorter production runs and product variations.

(ii) Larger inventory has to be maintained by both the manufacturer and the distributors.

(iii) Promotion and distribution expenditures increase when a separate program is used for different market segments.

(iv) When characteristics of a market segment change, the investment made already might become useless.

4) A US firm borrows yen at 4% for one year. The current spot exchange rate is 100yen/$ but is expected to change to 110yen/$ during the year.

let, the US firms borrow 100 yen with the rate of 100yen = $1 and after 1 yr it has to pay with 4% interest 104 yen. but the value of 1 dollar = 110 yen now so to pay 104 yen we have to pay only $0.96. Hence, the expected dollar cost is -4%(in percentage) of the yen borrowing.

5) Let, the US firms borrow 1 euro with the rate of 1.4$/euro and after 1 yr it has to pay with 5% interest 1.05 euro. but the value of 1 euro = $1.35 now so to pay 1.05 euro we have to pay. Hence, the expected dollar cost is 6%(in percentage) of the euro borrowing.