Essay on Currency and Low Valued Yuan
Student:Kerimova Aysha Wal-Mart and the Yuan Debate
1.Why is the value of the yuan so important?
Wal-Mart’s business strategy relies on low production costs which it can pass on to its customers. If Wal-Mart were a country then it would be China’s eighth largest trading partner ahead of Russia, Australia, and Canada. Wal-Mart’s non-Chinese owned suppliers operating in China number nearly 5,000 and all of them benefit from a low valued yuan compared to the dollar. The 176 million worldwide customers of Wal-Mart also benefit from the low valued yuan. With nearly 70% of Wal-Mart’s products coming from China a sharp increase in the value of the yuan against the dollar can be devastating …show more content…
4. Assuming that the yuan will appreciate further against the dollar, what should Wal-Mart do?
There are several strategies that Wal-Mart can employ to deal with an appreciating yuan. First, is hedging against currency inflation. This can be done through forward transactions. For example Wal-Mart can agree to purchase a certain amount of a particular product in the future for the current currency exchange rate. If the yuan appreciates against the dollar (also referred to as a Forward Discount) then Wal-Mart saved money, but if the yuan were to depreciate (also known as a Forward Premium) then Wal-Mart would lose money. (Peng, 2011)
It can also engage in Strategic Hedging. That is it can spread its currency hedging activities though out a number of different countries to mitigate the risks associated with dealing with only one other country. The idea is if Wal-Mart were to lose in a currency exchange bet in one country those loses could be made up by another currency exchange gamble from another country.
The company can also look into strategies that cut costs. In 2010 Wal-Mart in an effort to cut costs consolidated its