BIMRs For Bruce

Period 1
Business International Money Report (BIMR)

______________________________________________________________________________
A QUARTERLY FINANCIAL REPORT FOR INTERNATIONAL EXECUTIVES

Financial Hotline: Currencies, Interest Rates, Economic Analysis & Commentary
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FORAD Announcements
A few last reminders on dates and procedures for the first decision period:
1. Decision #1 is due by [time, Sunday, May 19].

2. Be sure to send the DecisionsT#P1.txt file.
3. Tender sales will be announced here weekly if they are to occur (none this period).
Company Financials & Competitor Results
Your company's financial reports can be started by exporting a spreadsheet file. Instructions are in the
FORAD Manual. All teams are starting with identical companies.
Quote for the Day
The Moving Finger writes; and having writ,

Moves on: not all your Piety nor Wit
Shall lure it back to cancel half a Line,
Nor all your Tears wash out a Word of it.
– Omar Khayyam
FORAD Product Markets
FORAD companies have suffered from adverse economic conditions for several periods. In the markets
served by both the German and Japanese subsidiaries, prices and sales volume fell continuously after the
last cyclical peak. The industry marketing board believes that this decline has now bottomed out –
hopefully – and that the most recent periods' results are positive indications that the industry is in for a
strong recovery.
As a result of these sluggish market conditions, companies in the industry have been hit by low
profits, a drain on liquidity, and now find themselves in considerable financial difficulty. Trade credit
terms were lengthened in an attempt to maintain sales volume, causing working capital needs to balloon.
This would have been worse except for the low levels of inventory that were achieved. Some
manufacturing capacity was also lost as companies in the industry sold off some plant to help ease their
liquidity problems. One positive note is that your company had only in the past two years starting
seriously exploring the international export alternatives for sales – which are now looking increasingly
encouraging.
The combination of reduced industry capacity and depleted inventories could lead to intense industry
shortages and other problems, especially higher costs, if sales volume were to increase sharply.
Production bottlenecks and strains on capacity would obviously also be possible. Companies are suffering
from historically high levels of indebtedness, much of it short term. Credit ratings are at junk bond levels,
CCC. Share prices have fallen to record lows, and the cost of borrowed funds has been quite high because
of these credit quality issues. These high costs of debt reflect poor credit qualities, not high interest rates,
as rates across all three currencies are at near record lows. The previous management team has been
dismissed.
You are the new management team. You probably have six to eight quarters, at most, to show results.
Outlook: Currencies and Interest Rates
The dollar has been on something of a slippery-slope for close to two years versus the euro, and sliding
for more than 16 months against the yen. The dollar closed last quarter at $1.2000/€, up at bit from the
previous quarter's closing value of $1.2580/€. The dollar closed the last quarter down against the yen,
ending the period at ¥110.00/$, a modest movement from the previous quarter's ending value of
¥112.40/$.
The expansionary monetary policy conducted by all major central banks – the European Central Bank
(ECB), the U.S. Federal Reserve (Fed), and the Bank of Japan (BOJ) – over recent years has resulted in
extremely low interest rates. Undertaken to combat financial crises and sluggish economic growth, they
have seemingly done the job. Economies are recovering, but growing fears of inflation are now expected
to see some tightening in monetary policies. Interest rates are expected to rise.
Three-month dollar LIBOR closed at 2.250%, with 3-month euro LIBOR at 3.500%. Japanese yen 3-
month LIBOR has stayed down, relatively unmoved for nearly a year, at 3.250% per annum. Possible
indications of growing market sentiment was seen, however, in six-month LIBOR rates. The dollar closed
the quarter down 25 basis points at 2.325%, while the euro showed no real movement, closing at 3.550%.
The six-month euro-yen LIBOR rate closed at 2.575%. Longer-term loan rates were steady in dollar
markets at 3.825%. Euro and yen long-term loan rates, 5.250% and 5.150%, respectively, were essentially
unchanged over the past two quarters.
Although forecasting short-term exchange rate movements is historically difficult, many market
forecasters and some of the larger bank-based treasury advisors are expecting dollar interest rates to rise
over the longer-term, leading to a medium-to-long-term outlook for a stronger dollar. The possibility of
new inflationary pressures arising from the return of economic growth – if growth does indeed happen –
will take time to influence rates. For the immediate short-term outlook, currencies are expected to be
driven by interest rate movements. Current 90-day forward rates are indicating slight continuations of the
current trends, but some analysts are predicting larger movements than indicated by the current nominal
interest differentials.
Market Outlook
The most recent quarter (Period 0) saw some of the lowest volume sales companies have seen in recent
years. The FORAD Marketing Board, however, believes that the market is on the brink of a substantial
recovery, leading to significant volume growth in Periods 1 and 2.
Period 0 [actual] German Subsidiary Japanese Subsidiary

Domestic sales (units) 18,000 90,000
Export sales (units) 70,000 190,000
Domestic price (at end of period) €1450 ¥ 45,750
Preferred currency of invoice U.S. dollars U.S. dollars
* Export prices should be translated into the appropriate invoice currency at beginning of period
exchange rates.
The following projected sales volumes and prices for the coming two periods, forecasts from the
FORAD Marketing Board, are considered conservative. But coming out of the recent recession,
marketing has been ‘politically cautious' in their projections.
Remember: Period 0 is now in the past.

You are making decisions for the coming period – Period 1.
The recent recession took a serious toll on sales volumes and sales prices. The price outlook in Japan
is healthy, as are sales volume forecasts. German sales volumes are also expected to rise, but the more
serious issue in Germany is the outlook for prices. Two different German competitors have already
announced price-cuts, so the outlook for prices – taking a conservative path – are much lower than the
recent past.
Period 1 [forecast] German Subsidiary Japanese Subsidiary

Domestic prices (at end of period) €1325 ¥ 47,500
exchange rates.

Domestic sales (units) 22,000-24,000 110,000-116,000
Export sales (units) 82,000-84,000 214,000-220,000
Domestic prices (at end of period) €1325-1330 ¥ 47,500-49,000
exchange rates.
Two-Year Forecast
The following two-year long-term forecast was produced by the Marketing & Sales Division as part of
your organizations strategic planning process. It, like all long-term forecasts, is tentative, and there are
few assurances that market volumes and price will perform as forecast. The next two-year forecast will be
issued one year from now. But clearly, from all market analyst perspectives, the market has seen its
bottom and is on its way back.
The long-term forecast, used by corporate planning for both product development and capital
investment purposes (plant capacity and potential expansion needs), depicts an industry which has
suffered significant deterioration in the recent downturn, but with rising prospects. Marketing and sales is
expecting the export markets for both foreign operating units to enjoy very rapid volume growth in the
coming year, with their longer-term outlooks set at more conservative levels. Currently, marketing and
sales is predicting a steady recovery in volumes for the coming four to five quarters, at which point there
is some concern about potential industry over-capacity or general market slow-down.
Period 2
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______________________________________________________________________________
FORAD Announcements
1. Decision #2 is due by noon Wednesday September 19th to the Thunderbird front desk
2. FX options and Tender Sales are available beginning in Period 2
Special Note: Your USBs will now contain 4 files
1. Assumptions.txt copy this into your Tower46 subdirectory for your next decision
2. DecisionsT#P2.txt copy this into your Tower46 subdirectory for your next decision
3. Detailed Actual Results - Team# Period 1.csv This is your firm's financial
results
4. Cartel Results.xlsx This is the summary of all team's results
The Detailed Actual Results file (csv) can be dropped into an Excel workbook. This allows you to create
the individual financial statements of all three business units and the consolidated company each week
with on file copy. The Cartel Results file is the four pages of summary data for all companies in the
competition, that same data posted weekly as results.
When installing the model for Period 2, it is best to be safe and clean out and delete all files on your
laptop hard drive and reinstall from the USB completely. That includes deleting the Tower46 subdirectory.
(You can always keep as many backups and other copies in other subdirectories, they just need to be
systematically named something else.)
After you restart the model for this period, make sure your proper team number is showing at the top of
the FORAD model page, and that all results for period 1 are showing in locked columns and cells.
Quote for the Day
The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a
reasonable one. The commonest kind of trouble is that it is nearly reasonable; but not quite. Life is not an
illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its
exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.
G. K. Chesterton as quoted by McCauley, 1938
Policy Statements & Team Organization
Look at the Policy Statement document posted on the FORAD page. This document details how you need
to organize your team (CEO, CFO, etc.) and the specific corporate financial policies which you will need
to start considering and creating for submission before/with the period 4 decision.

U.S. dollar interest rates were the source of some ‘no news' in period 1, with dollar-denominated interest
rates falling slightly on the short-end (3-month dollar LIBOR closed at 2.100%), with longer-term loan
rates bumping up a bit to 3.882%. Rich Youngston at RBC noted that the U.S. Federal Reserve's monetary
expansion policies appear to have reached their end, and the Fed may already be "pulling back on the
reins to slow inflationary forces now that the economy seems to be growing substantially again." Luis
Perez at Chase's Emerging Markets Desk in New York did note that the interest rate movements were
quite small, and might be nothing other than "a short-term attack of that ancient marauding tribe –
volatility."
The European Central Bank (ECB) is clearly now pulling its foot on the accelerator. The continuing
banking and economic crises dwelling on the EU's Mediterranean members have obviously motivated it
to continue to expand money and attempt to lower rates – with mediocre results to date. 3-month euro-
denominated LIBOR fell a few basis points, from 3.500% to 3.486%, over the past quarter, a movement
so small it may be nothing but ‘noise'. Even more importantly for many European corporate borrowers
was the good news with longer-term corporate borrowing rates, that closed the quarter at 5.000%.
Combined the rates made a definitive downward shift in the euro-yield curve. The ECB is not expected to
announce any significant policy changes in the coming two quarters, so there may still be some room for
both short and long-term rates to fall – which is the hope. The consensus of analysts in London and
Frankfurt are confident that euro-rates will remain relatively flat and quiet.
Like euro rates, Japanese yen rates decreased, with 3-month yen LIBOR falling precipitously from
3.250% to 2.688%. The continued Bank of Japan's monetary stimulus seems to be clearly hitting the
money markets (no liquidity trap here), but not as of yet helping on the long-end. Long-term corporate
borrowing rates in yen fell a few basis points, closing period 1 at 5.000%. The fact that rates fell more
dramatically on the short-end rather than rise on the long-end is causing most prognosticators of future
rate movements to believe that short-term rates may eventually drag down the long-term rates with their
movement.
The foreign exchange markets were relatively quiet in period 1, with the Japanese yen falling slightly
against the dollar to close at ¥115/$.¥114.2/$ This slight weakening against the dollar, however, when
combined with the fall of the dollar against the euro – closing at $1.24/€ $1.14/€ – meant that the yen-
euro cross rate moved substantially to a net-weaker yen, closing the quarter at 142 from the previous
quarter's 132. With the dollar falling against the euro, there are growing concerns over increases in core
dollar inflation – possibly rising to over 2.0% for the coming year.
The European euro markets were a bit baffling, possibly as a result of the recent Consumer Sentiment
Survey results of the European Union's commercial markets research. With recent consumer sentiment
down, spending could level off prematurely in the current economic recovery – which would not be
helpful for the German subsidiary. Those signals, however, are in contradiction to the demonstrated
growth in general industrial production in the first quarter – volume sales growth was good, not
exceptional, but growing pretty much in line with recent turn-of-the-year forecasts. Obviously the ECB
does not believe that member-growth is assured at this stage.
There were few noticeable cost increases arising from material or overhead costs in industry, either in
Japan or Europe. But increasing inflationary pressures are thought on the horizon which will eventually
bleed into the material and commodity markets, regardless of pronouncements by various central banks.
Expectations are for continued improvements on margins as manufacturers across the Continent ramp up
utilization rates from the rapidly rebounding economy. The largest impact was clearly felt in Germany
where product prices took a hit. Japan, however, does indeed show a more healthy rebound on a real-time
basis.
Oil prices rose only a dollar in period 1, closing the quarter at $36 per barrel, a welcome relief to a
number of oil-dependent economies, but not so welcome to corporate consumers and their operating
margins. It is still thought that ever-growing Chinese industrial growth could push oil prices back up
within the year, but not in the coming quarter or two. The deterioration in relations between the United
States and Iran, as well as the continued deterioration of production in Venezuela, is thought to pose a
significant threat to oil prices in the future.
Tender markets were inactive in period 1, but the market opens in Period 2. The Tender market is a
Dutch Auction structure, where individual companies submit bids – both price and volume – and the
market will fill its needs starting with the lowest price bid. Once filling its volume needs, the market
closes and the final price accepted becomes the closing and clearing price for all winning bidders. In
Period 2 the market is expected to be looking for between 12,000 and 18,000 units.
Market Forecasts
There was both good news and bad news in period 1. Production volumes were slightly higher than
forecast in Germany and Japan in period 1. Prices fell in Japan as expected, but were slightly above
forecast in Germany. The German subsidiary's profitability clearly took a significant hit.

Preferred currency of invoice US dollars US dollars
exchange rates.
The outlook for volumes is still on-line with current forecasts, so no altered vision for Period's 2 and 3
upcoming. Although the FORAD Marketing Board still believes the Japanese economy to be on a
moderately fast growth recovery path, Japanese prices are not expected to rebound any time soon.

exchange rates.

Domestic sales (units) 24,000 -27,000 116,000 - 130,000
Export sales (units) 82,000- 84,000 220,000 - 235,000
exchange rates.
Period 3
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______________________________________________________________________________
FORAD Announcements
1. Decision #3 is due by noon Tuesday October 2nd

2. Work on your policy statements (see file posted on FORAD page)
4. At some point in the semester every team will be required to create and use at least one complex
option position. A complex option is defined as the combining of two different options to create a
singular position. Examples are Range Forwards, Ratio Spreads, and Participating Forwards. It cannot
be simply a synthetic forward.
Quote for the Day
Lunkwill: Do you...
Deep Thought: Have an answer for you? Yes. But you're not going to like it.
Fook: Please tell us. We must know!
Deep Thought: Okay. The answer to the ultimate question of life, the universe, and everything is... [wild
cheers from audience, then silence]
Deep Thought: 42.
– A Hitchiker's Guide to the Galaxy, by Douglas Adams, BBC Radio 4, 1978.
The cost of money. U.S. dollar-based interest rates fell back in period 2. Euro-dollar 3-month LIBOR
rates closed at 2.3880% – down a meaningless series of basis points from the previous period close.
Dollar long-term loan rates were similarly inscrutable, falling 10 basis points to close at 3.900%.
Forecasters, and the U.S. Federal Reserve Board, are waiting for more data on industrial production, sales
volumes, and producer prices before revising dollar interest rate expectations.
As opposed to the relative non-movement in dollar rates, Euro-denominated rates were moving with
substance in period 2. Euro 3-month LIBOR rates closed the quarter at 3.720%, rising 25 basis points
from the previous quarter. Long-term euro-denominated corporate loan rates were [nearly] unchanged,
closing at 5.020%. Many market watchers are waiting for renewed signs of stimulus packages
forthcoming from the European Central Bank. Although the recent recession is now in the past, without
some continued stimulus, there is fear that the current recovery could stall quickly. If the ECB does
indeed to try and kick-start economic growth, expect Euro-denominated rates to fall in the next 6 months
to one year.
Euro-yen interest rates closed down across the board in period three, with 3-month Euro-yen LIBOR
closing at 2.625%, down 25 basis points, and yen-denominated long-term loan rates closing down at
4.750%. One market analyst noted, "the yen-carry trade could see something of a re-birth in the coming
year if recent trends continue." Lower yen rates, given the yen's relative stability versus the dollar (see
below), could reinvigorate multinational corporate borrowing in Tokyo. If yen rates were to slide even
marginally further, a number of corporate borrowers will move into more and more floating rates in the
hope that the bottom is still out of sight. The feared introduction of new BIS (Bank for International
Settlements) standards on corporate lending by banks, which many of the major Japanese money center
banks are now implementing to shore up bank balance sheets in light of "lessons learned" from the 2007-
2009 financial crisis, are not as yet showing any impacts.
Rates of exchange. The Japanese yen continued trading in a relatively narrow band, closing the quarter
down slightly against the dollar at ¥118.20/$. This margin weakening against the dollar – now into its
third consecutive quarter – is helping deflect some of the political pressures between the U.S. and Japan
as new trade negotiations begin. Recent confusion over the direction of the ruling party in Japan seems to
be gathering most of the attention, but analysts have expressed doubt that there are any new fundamental
weaknesses in the Japanese economy itself, so the yen may stay in a relatively tight trading range for the
coming two to three quarters. The stable yen is expected to hold down imported component costs in the
coming two quarters and aid the profitability of Japan's export sector in the short-term, given how many
of Japanese export products and processes rely on imported inputs.
The dollar/euro cross also remains in traditional trading ranges. Closing the second period at
$1.1840/€, a significant ‘reversion-to-the-mean' from the previous quarter's close. With the yen
weakening only slightly against the dollar, and the dollar weakening against the euro, the yen is showing
significant weakness against the euro, closing the quarter at ¥139.95/€. This is for all intents and purposes
now very close to ‘crossing the Rubicon' as one trader noted – the infamous ¥140/€ barrier. With little
interest rate movements among the three currencies, market forecasters are holding steady on their
outlooks. The only real forecasts are for mild movements back into traditional ranges – running for cover
– as one trader noted.
Oil prices remained quiet in the recent quarter, the spot market price creeping up to $32.40/barrel, a
price considered ‘sustainable' by Platts Oil Markets, one of the leading price synthesizers in the industry.
The outlook is mixed, with demand expected to rise marginally, but OPEC production holding steady, and
Nigerian production rising, despite the best efforts of OPEC to reign-in Nigerian production.
Costs and Margins
Deutsche Bank's economic analysis group released its annual Economic Competition Report, noting the
possibility of rising manufacturing costs globally. Although recent material and overhead expense
changes have been modest at best – and in fact flat in most cases, there is growing concern that material
cost increases may start experiencing upward pressure as a result of the recovery economies and outlooks
for both the European and Japanese markets. Labor costs, although growing, are not thought to be a
current threat.
Period 0 Period 1 Period 2 Period 3?

Germany:
Domestic materials (€) 60.00 61.00 60.50 61.00
Hourly overhead (€) 25.50 25.50 25.00 25.50
Domestic product price (€) 1450 1305 1300 1305
Japan:
Domestic materials (¥) 1750 1750 1725 1735
Imported material costs ($) 43.50 43.50 43.50 43.75
Hourly overhead (¥) 2,350 2,350 2,300 2,320
Domestic product price (¥) 45,750 48,500 50,100 50,500
Tender Sales. In period 2 there were more than 14,000 units offered, with three teams bidding. The
market clearing price for the quarter was 1660. Tender sales for period 3 are expected at roughly the same
level, 12,000 to 16,000 units.
Market Forecasts
Sales volumes in period 2 were slightly better than expected, price as well. Actual results are shown
below.

exchange rates.
The FORAD Marketing Board believes volume growth will continue, but is being careful with prices.

exchange rates.

Domestic prices (at end of period) €1300-1310 ¥50,500-52,000
exchange rates.
Period 4
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______________________________________________________________________________
FORAD Announcements
1. Decision #4 is due by noon Tuesday October 16th

2. Your corporate policy statements are due to me, via email, no later than your decision #4.
3. I still need some team names
THOUGHT FOR THE DAY
"A perfect hedge is only found in a Japanese garden."

– Gunter Dufey, Professor Emeritus, University of Michigan Business School
OUTLOOK: CURRENCIES & INTEREST RATES
The debate over the direction of Federal Reserve policy was made very clear in Period 3 when the Fed
announced its decision to do nothing. As a result, US dollar rates were largely unchanged in the quarter.
With its passive policy, the Fed seems to indicate that it wants to avoid any additional actions or
pressures that could raise interest rates in the slightest, and if possible, not slow the on-going business
recovery.
Eurodollar deposit rates and 3-month dollar LIBOR rates fell marginally in period 3, down only a few
basis points, with six-month LIBOR falling the same. Long-term rates moved similarly, closing at
3.886%. The markets do indeed seem to be in the doldrums, causing many corporate borrowers to shy
away from any new fixed rate obligations in the expectation (or hope) of further decreases in rates as a
result of Fed action to kick-start the slowing anemic economy and recovery. Whether the Fed will get
increasingly aggressive in its stimulus packages or not is the debate of the day. If markets and volume
growth continues to slow – and there are indications of slowing volume growth – expect the Fed to work
more vigorously to push interest rates down further.
The Japanese yen yield curve flattened dramatically in Period 3, as the Bank of Japan seems to have
aggressively undertaken a radical solution to the "liquidity trap." The Bank of Japan is now rumored to
have undertaken open market operations to drive short-term rates upwards, but provide new injections in
the longer term market to keep longer term rates down for more fundamental corporate funding. Three-
month Euroyen LIBOR rates closed up 3.125%. Long-term corporate rates fell to a two-year low of
4.480%, driving a large number of corporate borrowers into the yen market in hopes of locking in rates
before the ‘bounce' comes. And as one trader noted – the bounce always comes one quarter before you
expect it. Most analysts do not believe the Bank of Japan wants to see anything significantly lower in the
current market.
Interest rate movements in euro-land in Period 3 were uni-directional: up. 3-month Euro LIBOR rates
rose to close at 3.885%, the highest in more than three years. Even more surprising was that fixed long-
term borrowing rates rose significantly, more than 35 basis points to 5.385%, reflecting pressures on the
short-end. It does appear that corporate demand is now slowing locally in Europe, so slowing industrial
production in both Japan and Germany may indicate slackening corporate capital demand. The most
optimistic of analysts see this as a precursor to slow growth, while the more pessimistic are fearing
something worse. With rates as low as they are, hope remains for maintaining the recovery.
The dollar remained relatively unchanged in Period 3 against the euro, ending the quarter at $1.19/€,
barely down from the previous quarter's $1.18/€. This kept the dollar back in the medium-term trading
range according to market technical analysts, and was seen as a stabilizing movement. It was a bit of bad
news for US/EU trade discussions, as the European Union continues to argue the dollar is ‘undervalued'
against the euro, despite its fall. This of course has fostered fears within the EU as Brussels continues to
try and provide a positive environment for "Mediterranean economic growth" to ease the sovereign debt
struggles of Greece, Italy, and Spain, while quelling anxiety over continuing Brexit preparations.
The Japanese yen was also a non-story in Period 3, closing at ¥117/$, with no appreciable directional
movement from the previous quarter's ¥118/$. All indications are that the Bank of Japan would indeed
like to see a weaker yen, soon, as pressures on Japanese manufacturing margins are already increasing as
a result of overhead and import component prices. A stronger yen will not aid exports in the near-term
with this movement. The oil market was quiet in Period 3 with price of Brent Blend closing slightly up at
$37.
Tender Markets
Two teams bid and gained from the tender market in Period 3. Team 1 opened the bidding for 7,000 units
at a low-bid price of $1,590, followed by team 3 with a similar bid for 7,000 units at a price of $1,650.
This latter price was the clearing price for the period. As a result both teams added $11.55 million in
revenue for the quarter. Money was left on the table as the tender market was looking for 16,500 units.
Market Forecasts
Market volumes and prices were largely as expected in Period 3. Sales volume growth is definitely
slowing, and forecasts are being revised downwards. Marketing is holding the line on price,
conservatively, but clear competitive pressures are rising.

exchange rates.
The FORAD Marketing Board is now preparing its end-of-year two-year forecast (to be published after
period 4). Although volume growth had previously been expected to grow rapidly through the year end,
period 3's slower growth has now dampened expectations and the market outlook for prices is a bit more
bearish.

exchange rates.

exchange rates.
Period 5
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______________________________________________________________________________
FORAD Announcements
1. Decision #5 is due by noon Tuesday October 23rd.

2. The new 2-year long-term forecast is published in this issue.
3. The outline for your FORAD Biennial Reports is posted on the FORAD page.
Quote for the Day
"Well, in our country, said Alice, still panting a little, "you'd generally get to somewhere else – if you ran
very fast for a long time as we've been doing."
"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep
in the same place. If you want to get to somewhere else, you must run at least twice as fast that."
– Through the Looking Glass, And What Alice Found There, Lewis Carroll, 1871
Outlook: Currencies, Interest Rates & Commodity Prices
U.S. dollars. U.S. dollar interest rates continue to creep upwards. Three-month LIBOR rates rose to
2.626%, up more than 30 basis points after having slid downward for two quarters. The bond markets
responded accordingly – with a strong dose of pessimism, partly hoping for a softening stance by the
Federal Open Market Committee. Long-term loan rates in the dollar markets also edged upwards, moving
from 3.886% in the previous quarter to 4.120%. Speculation is now focused on the possibility that the Fed
may levy more anti-inflationary pre-emptive strikes, adding renewed pressure for rates to begin to rise
again – what a number of economists are now terming ‘inevitable.' The Federal Reserve Chairman,
however, is taking heat from the President, the President noting that his appointment ‘might have been a
mistake.'
Oil prices continued their rise in Period 4 as a result of rising tensions in the Persian Gulf. Brent crude
closed the quarter at $36.20 a barrel in period 4, the highest rates since in over three years. Tensions in the
Gulf may, however, calm markets in the coming quarter, leading to some forecasts of a return to a $32 to
$34 per barrel price range. One CME futures trader noted that despite market fears related to the Jorge
Effect, when markets move completely opposite to all logic or rationality, the price of oil actually
reflected economic fundamentals and expectations. Oil prices are expected to fall a bit in the coming two
quarters, but then again, the forecasters (including Jorge) have been wrong before.
Japanese yen. Japanese yen rates ‘floated upwards' in the words of one analyst in period 4. The 3-month
euro-yen LIBOR rates rose, closing at 3.388%. Long-term yen loan rates also rose, but in a more mild
movement, closing at 4.625% – a rise of only 14.5 basis points. Analysts believe that the increase in long-
term corporate rates reflects some optimism by Japanese corporate borrowers over business activity –
prices and volumes – despite other market forecasts. Analysts are once again debating whether this is only
an "eye in the storm," and interest rates will likely calm (flat) or at least bottom out. And of course the
Tokyo Economics Group now expects the Bank of Japan to return to ‘easing', setting the stage for
increased monetary growth and possibly a flattening of interest rate movements.
The Japanese yen itself was seemingly indifferent to the short-term interest rate increases, moving
barely a yen to close the quarter at ¥116/$. The market is still expecting the yen to return to its previous
trading range of between 110 and 114 within the next two quarters. Trade tensions between the U.S. and
Japan are thought to weigh heavily on Japanese monetary authorities, and a slightly stronger yen would
take pressure off coming trade talks. If the market doesn't make the move soon, intervention is possible.
Euros. The European Central Bank (ECB) did not react to early indicators of slowing business activity, as
it continued to restrict monetary growth and drive interest rates up. Euro-denominated LIBOR rates rose
in Period 4, 3-month Euro-LIBOR rates rising 25 basis points to 4.125%. This is the third consecutive
definitive increase in short-term rates, arguably a strong signal of where the ECB intends to go. Euro-
denominated long-term corporate debt rates, like those in Japan, rose only marginally, however, closing
the quarter at 5.420%. Euro-rate fixed income strategists are hoping fo a Jacques Mayol movement,
however, a sudden ECB directional change to push interest rate movements down when they see growing
evidence of economic stagnation. The ECB may indeed be increasingly sensitive and move to avoid a fire
storm of controversy in Brussels – there has been a distinct lack of progress on the EU unemployment
rate.
Germany's domestic material costs experienced some upward movement in the quarter (as did many
of the general operating and material costs throughout the industrial countries), and with early surveys of
purchasing managers indicating that the economic recovery is stalling, price squeezes on the product level
remain under pressure. The euro itself seems to be slightly gaining ground against the dollar, closing the
quarter at $1.1420/€ from the previous quarter's $1.1920/€. If recessionary forces become confirmed, the
euro may continue to trade in a narrow band between 1.15 and 1.25 in the coming two quarters.
The tender market was active in Period 4. Teams 1 and 2 bid 12,000 units and got all 12,000 units.
Team 1 set the market clearing price, a healthy 1590, and significantly higher than the bid price of Team 2
(to Team 2's benefit). Once again, however, the market was unrequited, the market looking for nearly
18,000 units with only12,000 bid. The market is expected to remain in the same volume range for the
coming year.
Market Forecasts
Actual period 4 results are shown in the following table. Volumes and prices were essentially flat.

exchange rates.
The company's Marketing Board has issued its new two-year market outlook, and surprised many within
the organization on its bearish outlook. Sales volumes are now expected to stagnate – showing little
growth for the next two quarters – at a minimum. Prices and margins are expected to remain under heavy
pressure as the fears of excess volumes on the market are likely to put a squeeze on profitability.
exchange rates.

exchange rates.
Annual Two-Year Market Forecast
The annual issuance of the two-year volume forecast was released yesterday. The Marketing and Business
Development Group, as a result of the recent slowing in sales volumes, revealed a much more bearish
volume forecast for the coming year, with expected recovery in the following six to 12 month period. The
major uncertainty is what this may mean in prices.
Period (000s of units) 5 6 7 8 9 10 11 12

German Domestic Sales 26.2 27.0 27.0 27.0 28.0 28.5 29.0 29.5
German Export Sales 86.0 87.5 87.0 87.0 87.5 89.0 90.0 91.5
Japanese Domestic Sales 127 131 130 132 135 138 140 142
Japanese Export Sales 242 247 250 255 255 312 318 324
Period 6
______________________________________________________________________________

______________________________________________________________________________
FORAD Announcements
1. Decision #6 is due by noon Tuesday October 30th.

2. The outline for Biennial Reports is posted.
Quote for the Day
There is no more delicate matter to take in hand, nor more dangerous to conduct, nor more doubtful in its
success, than to be a leader in the introduction of changes. For he who innovates will have for enemies all
those who are well off under the old order of things, and only lukewarm supporters in those who might be
better off under the new.
– N. Machiavelli, The Prince
FORAD Defenses
FORAD defenses will be held on Thursday evening November 29. Teams defend in reverse order of their
finish, 4 then 3 then 2 then 1. Defenses begin at 6pm.
Each team will begin by introducing their team members, their individual roles, and then
summarizing team challenges and performance with PowerPoint. This intro should not exceed 10
minutes. This is then followed by 45 to 60 minutes of Q&A with the FORAD panel. The panel this term
will include Professors Booth, Davison, Gibbons, and Moffett, as well as Ms Helen Johnson, CFO of
Insight North America, and Mr. Bruce Edlund, Treasury Director, Citrix Systems (MBA ‘96).
Complex Options
A reminder that all teams must, at least once in the term, utilize a complex option in their foreign
exchange risk management activities. A complex option is any combination of a put and call option which
creates a combined position of some desired trait (zero premium, reduced premium, artificial forward,
reduced premium with ATM strike, etc.). Synthetic forwards do not count.
Outlook: Currencies & Interest Rates
The meeting of the G10 central bankers in Amorriebieta, Spain, last week is still being digested in terms
of prospective impacts on the major money markets. Central bank governors, in their joint communique
ending the conference, noted that "there was real need to undertake strong anti-recessionary actions at this
time, as product markets around the globe were slowing dramatically – and threatening the coming annual
economic outlook." The markets in New York, London, Frankfurt, and Tokyo immediately took the news
for what it was intended -- a call for a loosening in lending with expectations of lower interest rates in the
near future.
That is of course in addition to continuing fears around oil prices. Oil continued to rise in Period 5,
closing at $40.60/bbl, as tensions have increased in the Persian Gulf and Strait of Hormuz, Although
Brent Crude is at the highest level it has seen in more than two years, some crude trading houses are
looking for prices closer to $35 by the end of next quarter. Over the longer term the relative
supply/demand and crude refining outlook still is expected to drive prices lower, but when that will
actually happen is difficult to say.
In a response which seemed to say "We believe you," Euro-euro 3-month LIBOR rates continued to
rise, closing at 4.525%. This constituted one of the largest quarterly increases in more than three years, as
the European Central Bank continues to pull back on the reins despite slowing business activity. Longer-
term corporate borrowing rates also rose, but were more subdued in their movement.
The U.S. markets, however, saw some slight ebbing of interest rate movements. Three-month dollar
LIBOR closed down a small bit at 2.5% flat. Although a small signal, it was possibly an early signal of
renewed pessimism on the U.S. economic recovery. A number of analysts reacted quite negatively to the
continuing trend, pointing to continuing fears of an aborted recovery (volume forecasts in the following
section reflect this sentiment). The government treasury, in its quarterly report to Congress, noted that it
would be coming to the short-end of the market relatively more frequently in the coming year as a result
of fiscal policy constraints requiring little additional refunding – which may have kept short-term dollar
rate increases down. Long-term dollar loan rates barely moved, closing at 4.180%. It appears that the
opportunities for fixed rate dollar funding may still be improving – depending on where the bottom rests.
The result was a dollar which gained ground against the euro, closing at $1.1080/€. The dollar-euro
movement was considered large by traders, and has disrupted many of the short-term forecasts. Andrew
Kreiger, chief currency strategist for Bankers Trust/New York, commented that "If U.S. inflation figures
continue to show control, and if U.S. dollar-denominated interest rates continue to reflect these flagging
inflationary forces, and if there are no substantial changes on the other side of the Atlantic, the dollar may
stay in a relatively stable and stronger trading range against the euro of $1.05/€ to $1.15/€ by the end of
the coming six months. But that does include quite a few ifs."
To nearly complete the cycle Japanese yen interest rates largely held steady in period 5. Short-term
euro-yen LIBOR rates holding at 3.380%, and long-term loan rates creeping up to 4.750%. The Japanese
bond market has been quiet, as expectations are mixed on the direction of yen interest rate movements.
The Fixed-Income Sun is clearly rising. The yen itself, took ground against the dollar, rising to ¥108/$.
The Bank of Japan was audibly relieved given its recent weakness. The cross-rate result was dramatic, the
yen appreciating against the euro to close at ¥119.66/€.
Tender Sales
The tender market saw a lot of interest in Period 5, but all the results accrued to one team, Jay & The
Wildcards. Bids for more than 43,000 units were placed, all teams bidding, but all 16,500 units were
captured by team 4. Possibly unfortunately, that also means that Team 4 set the market-clearing price of
1048, quite low. The market is expected to continue to seek volumes between 12,000 and 18,000 units for
the coming three quarters.
Market Forecasts
Volume growth in period 5 stayed slow – essentially flat. There were little flashes of light in prices,
however, giving producers some hope on recovering margins.

exchange rates.
The FORAD Marketing Board believes volume growth has now hit a ‘dead calm' in the words of one
analyst. Volume growth forecasts are out. More importantly, and of more concern, is a growing fear that
prices – particularly in Germany – could fall as markets soften. Forecasts have been revised –
downwards.

exchange rates.
Period 7 {forecast] German Subsidiary Japanese Subsidiary

Domestic prices (at end of period) €1315-1320 ¥ 51,000
exchange rates.
Period 7
______________________________________________________________________________

______________________________________________________________________________
FORAD Announcements
1. Decision #7 is due by noon Tuesday November 6th

2. Begin work on your biennial reports now. Double check very carefully the required outline posted on
the FORAD page for your Biennials.
3. Biennial reports turned in after 12 noon on Wednesday November 21st will lose one grade letter on
their defense grade. No exceptions.
BIENNIAL REPORTS ARE DUE WEDNESDAY NOV 21

(4 copies, spiral bound + 1 PDF, by noon)
Quote for the Day
Our true "core competency" today is not manufacturing or services, but the global recruiting and
nurturing of the world's best people and the cultivation in them of an insatiable desire to learn, to stretch
and to do things better every day. By finding, challenging and rewarding these people, by freeing them
from bureaucracy, by giving them all the resources they need——and by simply getting out of their way
——we have seen them make us better and better every year.
Jack Welch, General Electric's Annual Report 2000
The news dominating Period 6 was the dismal performance of sales volumes. German and Japanese sales
volumes were essentially unchanged. That, combined with no real price improvement means that
revenues are flat, costs are rising – The Squeeze – as one analyst described it. With reduced operating
cash flow generation and competing demands, corporate prioritization has become the leading topic for
discussion.
This slowing market growth was, unfortunately, in a rising interest rate marketplace. Short-term
LIBOR rates were up in all major currency markets – euro, dollar, and yen – as central banks all pulled
back on the reins of monetary growth in preemptive attacks on incipient inflation. This global fear of
inflation (demand-pull rather than cost-push) has resulted in 3-month LIBOR rates continuing to rise.
Floating rate financing is under attack. The time of quantitative easing is clearly over.
Curiously, the U.S. market may be the strongest among the three major economic zones, yet 3-month
LIBOR rates are actually cheapest there, closing period 6 at 2.885%. Longer term corporate lending rates
were also lowest in US dollar markets, closing at 4.250%. With all leading economic indicators showing
slowing economic growth, and equity markets continuing to fall to two-year lows, many now believe that
the Fed will not allow further upward movement in interest rates. Borrowers are hoping for actual
reversals – some cuts in rates in the coming two quarters.
Meanwhile the European Central Bank has intensified its anti-inflationary efforts, with 3-month
LIBOR rates rising to 5.000% flat. This was nearly a 50 basis point jump, and is seen as a strong
indication of their commitment to a higher interest rate environment. Corporate longer term loan rates
also rose, closing at 5.625%. Material and overhead cost pressures seemed to have not fully stopped,
however, as overhead rates in particular continued to rise. Uncertainty is over, as the ability of producers
to push through costs to consumers into final prices has not seen significant success. These movements
together gave rise to renewed debate across Western Europe on ECB policies – as they had continued to
fight inflation in the face of slowing economic growth. The EU's Office of Consumer Affairs, in its most
recent quarterly bulletin is still forecasting growth in consumer spending for the coming two quarters.
Japanese yen money and capital market rates demonstrated much of that seen in European markets.
Three-month yen LIBOR closed up at 3.500%, with longer term corporate loan rates at 4.720%. With
many companies pulling back on new projects and investments, capital demands are falling and interest
rates may start reflecting decreased funds demand, despite central bank policy. New Bank of Japan data
has indicated a growing number of Japanese corporate borrowers – or corporate borrowers from
anywhere borrowing in Japan – are flipping from floating-rates to fixed-rate with the increases in rates.
In currency markets, the "silence was deafening" in the words of Igor Bharat, a currency analyst for
DresdnerKleinwort. The dollar continued its now 3-quarter trend of strengthening against the euro,
closing the quarter at $1.07/€, mostly on reports of small economic recovery in the ‘disaster zone' of the
Greek, Portuguese, and Italian economies – economies weighed-down with heavy loads of sovereign
debt. The dollar was down slightly against the yen – closing the sixth period at ¥106/$. Sadly, only the
U.S. government deficit is worse than that of Japan, and the markets know it. Currency prognosticators
are warning of a further strengthening of the dollar in the near-term if there is any sign of US
congressional action. Many believe much of this debate could lead to a bit of "over-shooting" on the part
of the dollar. Oil settled in the most recent quarter, falling back below $40 to $38.20 per barrel.
The tender market was very active in Period 6, with 46,000 units bid in competition for 16,800 units
tendered. The market-clearing price of 1104 was set by Team 4 – Jay & the WildCast, as they took the
entire tender allotment for the period. The tender market is expected to stay active at current levels for the
coming year.
Market Forecasts
Volume growth was essentially flat in Period 6, disappointing at best. Prices showed some minor strength
given the lackluster volume results. Period 6 actual results were as follows:

exchange rates.
The FORAD Marketing Board has essentially frozen next period forecasts of price and volume at Period
6 levels given the increasingly stagnant market results. Minor growth in volumes – not prices – is seen for
period 8.

exchange rates.

exchange rates.
Period 8
______________________________________________________________________________

______________________________________________________________________________
FORAD Announcements
1. Decision #8 is due by noon Tuesday November 7th to the Global Business office
2. Begin final work on your biennial reports now.
BIENNIAL REPORTS ARE DUE WEDNESDAY NOV 22

(4 copies spiral bound + pdf, by noon, to GB office)
Quote for the Day
We are not ignorant of the theory of how increasing financial leverage results in maximizing returns. That
having been said, over the years, we've seen repeated examples of others in this business who've fallen
under the spell of erudite consultants and investment bankers, all using the right buzzwords espousing the
benefits of some financial transaction, buttressed by financial theories that in reality only supported what
we call "the clandestine rule of finance."1 Once in their clutches, these erstwhile competitors got talked
into doing things that in finance textbooks made perfect sense, but in the real world had catastrophic
effects on their businesses. Yogi Berra never went to Harvard Business School, but he did understand one
important principle. To quote Yogi, "In theory there is no difference between theory and practice. In
practice, there is."
– Peter Rose, CEO and Chairman, Expeditors International, 8k-11-20-06, p.4.
1 The Expeditors version of the Clandestine Rule of Finance is paraphrased as "for every ‘brilliant'
transactional idea that is presented to management under the guise of maximizing shareholder returns,
there exists a huge Fee that is inversely proportional to the actual return realized when the transaction
occurs."
Interest rates in period 7 were, as noted by a key London trader, ‘Like London, a continuing series of
endless days of dark skies and sluggish rates. The forecast: drizzle.'
Three-month Euro-denominated LIBOR rates held steady at 1.500% in period 7. Six-month Euro-
LIBOR were also essentially unchanged, with long-term euro loan rates sliding 5 basis points to 3.200%.
Many euro-watchers are a bit befuddled at present, with the slowdown in economic growth failing to
kickstart with the lower interest rates the ECB is pumping out into the market.
Dollar-denominated interest rates continued to slide on the short end, with three-month dollar LIBOR
down from 2.000% in the previous quarter to close at 1.825% in the most recent quarter. Long-term
corporate loan rates, however, fell less, closing at 3.700%. The U.S. Department of Commerce reports
indicate that the producer price indexes are showing that the flat but higher oil prices seen over the past
few quarters are still fueling cost pressures throughout the U.S. manufacturing sector. Once the energy
components are removed, however, non-energy related producer prices seem relatively stable, possibly
closing the year up on 1.5% to 2.0%. This is seen as welcome news as industrial production continues to
slow.
The recent Bank of Japan report on the status of risk-adjusted capital reserves in the Japanese banking
system fueled little interest in the land of the rising sun. The Report, which is currently under heated
debate, indicated that once again the losses related to under-reporting of non-performing loans – thereby
delaying write-downs – is a significant risk factor for the Japanese financial sector. The Bank of Japan
reacted quickly and defensively, but little real movement has been seen to date. Yen-denominated three-
month LIBOR remained unchanged at 1.000%, with long-term corporate loan rates spiraling downwards
to 3.000%. The fall-out from the Report will most likely continue in the coming months as concerns over
the health of the money center banks add tension to yen markets.
The Yen. In concert with these tensions, the yen's value continued is near year-long slide against the
dollar, moving to ¥121/$ at the end of the quarter. This was the necessary dark side to the BOJ interest
rate movement. Currency traders are hoping for a return to ‘normalcy' in the coming 3 to 6 months.
The Euro. The rise in euro-interest rates did indeed strengthen the euro, as it closed the quarter up
further against the dollar at $1.32/€. It is now bordering on the boundaries of its traditional trading range,
with many wondering if its momentum will follow what most technical analysts refer to as ‘over-the-curb'
fallout. That theory adheres to the belief that as long as the rate stays within traditional bounds, most
movements and speculation with be stabilizing in impact; i.e., will drive the rate back towards the
historical mean. The ‘curb' concept focuses on the premise that once outside the traditional boundaries of
the trading range, the rate will continue to spiral away from the historical mean. Time – and the actions of
market players – will tell.
Tender sales in period 7 were taken completely by one team – Make America FORAD Again –
captured all 17,000 units at a market clearing price of 1198 (which they set themselves). Tender volumes
are expected to stay between 15,000 and 20,000 units in the coming six month period.
Market Forecasts
Volume growth in period 7 continued to grow at an exceedingly slow pace. Period 7 results were as
follows:

exchange rates.
The FORAD Marketing Board believes volume growth will stay on its current slow growth path to the
long-term forecast. Prices are expected to hold firm but not show significant improvement.

exchange rates.

exchange rates.

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Period 1

Business International Money Report (BIMR)

A QUARTERLY FINANCIAL REPORT FOR INTERNATIONAL EXECUTIVES

1. Decision #1 is due by [time, Sunday, May 19].

Company Financials & Competitor Results

Quote for the Day

The Moving Finger writes; and having writ,

FORAD Product Markets

Outlook: Currencies and Interest Rates

Period 0 [actual] German Subsidiary Japanese Subsidiary

Remember: Period 0 is now in the past.

Period 1 [forecast] German Subsidiary Japanese Subsidiary

Period 2 [forecast] German Subsidiary Japanese Subsidiary

A QUARTERLY FINANCIAL REPORT FOR INTERNATIONAL EXECUTIVES

Special Note: Your USBs will now contain 4 files

Quote for the Day

Policy Statements & Team Organization

Outlook: Currencies and Interest Rates

Period 1 [actual] German Subsidiary Japanese Subsidiary

Period 2 [forecast] German Subsidiary Japanese Subsidiary

Period 3 [forecast] German Subsidiary Japanese Subsidiary

A QUARTERLY FINANCIAL REPORT FOR INTERNATIONAL EXECUTIVES

1. Decision #3 is due by noon Tuesday October 2nd

Quote for the Day

Outlook: Currencies and Interest Rates

Costs and Margins

Period 0 Period 1 Period 2 Period 3?

Period 2 [actual] German Subsidiary Japanese Subsidiary

Period 3 [forecast] German Subsidiary Japanese Subsidiary

Period 4 [forecast] German Subsidiary Japanese Subsidiary

A QUARTERLY FINANCIAL REPORT FOR INTERNATIONAL EXECUTIVES

1. Decision #4 is due by noon Tuesday October 16th

THOUGHT FOR THE DAY

"A perfect hedge is only found in a Japanese garden."

OUTLOOK: CURRENCIES & INTEREST RATES

Period 3 [actual] German Subsidiary Japanese Subsidiary

Period 4 [forecast] German Subsidiary Japanese Subsidiary

Period 5 [forecast] German Subsidiary Japanese Subsidiary

A QUARTERLY FINANCIAL REPORT FOR INTERNATIONAL EXECUTIVES

1. Decision #5 is due by noon Tuesday October 23rd.

Quote for the Day

Outlook: Currencies, Interest Rates & Commodity Prices

Period 4 [actual] German Subsidiary Japanese Subsidiary

Period 6 [forecast] German Subsidiary Japanese Subsidiary

Annual Two-Year Market Forecast

Period (000s of units) 5 6 7 8 9 10 11 12

A QUARTERLY FINANCIAL REPORT FOR INTERNATIONAL EXECUTIVES

1. Decision #6 is due by noon Tuesday October 30th.

Quote for the Day

Outlook: Currencies & Interest Rates

Period 5 [actual] German Subsidiary Japanese Subsidiary

Period 6 [forecast] German Subsidiary Japanese Subsidiary

Period 7 {forecast] German Subsidiary Japanese Subsidiary

A QUARTERLY FINANCIAL REPORT FOR INTERNATIONAL EXECUTIVES

1. Decision #7 is due by noon Tuesday November 6th

BIENNIAL REPORTS ARE DUE WEDNESDAY NOV 21

Quote for the Day

Outlook: Currencies & Interest Rates

Period 6 [actual] German Subsidiary Japanese Subsidiary

Period 7 [forecast] German Subsidiary Japanese Subsidiary

Period 8 [forecast] German Subsidiary Japanese Subsidiary

A QUARTERLY FINANCIAL REPORT FOR INTERNATIONAL EXECUTIVES