IPO and Dollarization

Most multinational companies (MNCs) secure equity funding in their home countries; however, some may choose a global IPO in which “they can simultaneously access equity from multiple countries” (Madura, 2015, p. 523).  In placing the stock, these MNCs focus on a few countries where they have large subsidiaries that require financing.  The MNC’s stock is listed on a foreign exchange in the foreign country and is denominated in its local currency allowing investors to trade their stocks there.  The local investors will only purchase stocks in a global IPO if the MNC offers a large number of stocks locally as this ensures a more liquid and active local secondary market for the stock, makes trading them easier for the local investors (Madura, 2015).

  • Why did Prada need additional capital?
  • Why did Prada choose to issue its IPO in Hong Kong? What were the advantages and disadvantages of doing so?
  • What circumstances might make a foreign IPO ineffective for a company like Prada?
  • What other financing options were available to Prada?
  • What currency exposure risks did Prada face? How could the company have hedged against them?
  • For a family-owned private company such as Prada, how did the dilution effect of the IPO impact their control of the company?

Topic 2A.  Ecuador Dollarization Mini Case Study

Dollarization is the replacement of a foreign country’s currency with the U.S. dollar. Dollarization is different from pegging, when pegging, the foreign countries retain their local currencies. The decision to dollarize cannot be easily reversed as the country does not have a local currency anymore (Madura, 2015).

For example, the Gulf Cooperation Council (GCC: Saudi Arabia, United Arab Emirates, Bahrain, Qatar, and Omar) peg their local currencies to the U.S. dollar using a fixed exchange rate i.e. their currencies change up and down with the changes in the U.S. dollar; and accordingly their economies are affected by the U.S. economy. This also has an impact on their revenues are most of their oil exports are in U.S. dollar.

From 1990 to 2000 Ecuador’s local currency, the sucre, depreciated around 97% against the U.S. dollar. The sucre weakness led to volatile interest rates, high inflation, and unstable trade conditions.  In an effort to stabilize economic conditions and trade, Ecuador replaced the sucre with the U.S. dollar in 2000, and used it as its currency.  By November of the same year, economic growth has increased, and in inflation decreased.  So it seems that dollarization had a favorable effect (Madura, 2015).

Read

Berríos, R. (2006). Cost and benefit of Ecuador’s dollarization experience.  Perspectives on Global Development & Technology,5(1/2), 55-68. doi :10.1163/156915006777354491

  1. Why did Ecuador choose to dollarize?
  2. Fast forward: What is the impact of the dollarization on the country today? In retrospect, was it a good decision to dollarize?
  3. How important is transparency of the financial system when dollarizing?
  4. What is the combined impact of dollarization and low revenue (due to decreasing oil prices) on the Ecuadorian economy today?

1 page for each section (as close to a page as possible)(Prada and Dollarization)

Answer each question individually

You can use your own references but please include the ones provided also

No cover page needed

Posted in Uncategorized