(a) The managers of A, a major international copper processor are considering a JV with
Traces, a company owing significant copper reserves in a South Amerincan country. If the
JV were not to proceed A would still need to import from Traces. A’s CEO is concerned the
government of Trace may impose some constraint to free trade which puts A at a
competitive disadvantage in importing copper. A further director considers that this is
unlikely due to the existence of WTO.
You are required to briefly discuss possible risks involved in the currency transaction
(5marks).
The proposed JV will be for an initial period of 4 years. Copper77 will be mined using a
new techniques developed by A. A will supply machine at an immediate cost of 800
million pesos and 10 superviors at an annual salary of 40,000 pounds each at current price.
Additionally A will pay half of the 1000million pesos per year (at current price ) local
labour and other expenses will be increased in line with inflation in UK and South
American country.
Inflation in the south American country is currenly 100% per year, the government is
attempting to control inflation and hopes to reduce it each year by20% of previous year’s
rate; and 8%in UK which remains constant.
JV will give A 50% shares of Traces’ copper production, with current market price at
1500pounds per 1,000kilogrammes. Trace’s production is expected to be 10million kilo
each year and copper price is expected to rise 10% per year in pounds. At the end of 4 year