Chun-Kit Ng (632-38-3315)
Brian Low-Thue (617-38-1146)
(Sam) Chun-Tien Wong (635-30-3672)
Mei-Kee Khoo (630-52-1190)

FINA 4386
Chapter 3 (Case)

Question 1
Based on the information provided, developed a forecast of MPC's annual production (in rolls) needed to accomodate demand in the future. Since orders for this year have already occured, focus on the years following this year.

To estimate this annual production, we must first analyze the effect of NAFTA. This agreement according to this case study has eliminated 12% tariff. Thus, the demand for both Canadian goods and U.S. goods are both increasing. "The expectation of a strong Canadian dollar were driven by an anticipation that numerous Canadian firms would capitalize on the free trade agreement more than U.S. firm which would cause the increase in the U.S. demand for Canadian goods to be much higher than the increase in the Canadian demand for U.S. goods." This constitutes to the reason that we need to examine the effect of exchange rate. For instance, the change in the exchange rate is approximately 13.16% (0.1 / 0.76). The tariff elimination is 12% that give us the net effect from the difference of the tariff and the exchange rate is about 1.16%. This net effect of 1.16% means the increase price of the product by 1.16%. According to the case, it is estimated that U.S. demand rises (declines) 3% for every 1% decrease (increase) in the price paid by U.S. consumers on average. Therefore, with the negative net effect, it will cause the U.S. demand to decrease about 6,253 (0.0347 X 180,000) rolls of paper. Our estimation for the forecasting is 197,747 (200,000 + 4000 - 6253) rolls of paper. 4,000 (20,000 X 20%) is the increase of demand in the overall Canadian demand for paper. The forecast production is estimated to decrease.

Question 2
Explain the underlying reasons for the change in the demand and the implications.

The underlying reasons for the change in the demand are the followings. The first reason will be the change of exchange rate. In this case, the value of the Canadian dollar increased. Therefore, the demand for the paper will decreased. Under this circumstance, balance of payments (BOP) problem arise. The implication of the BOP is that MPC may decrease the price so that the dollar price for the paper could remain unchange. Depreciation in the local currency could be accompanied by a depreciation in other currencies too. In other words, the U.S. paper producers may reduce Canadian imports, while increase imports from Asian countries. Lastly, decline in the value of the dollar may not immediately cause Canada to shift their imports from say Europe to the U.S.

Question 3
Would the general effects on MPC be similar to the effects on a U.S. paper producer that exports to Canada?

There will be an increase in the demand of U.S. products because of the exchange rate that caused the price of U.S. products to be lower. The general effects on MPC will not be similar to the effects on a U.S. paper producer that exports to Canada. They will be in the opposite direction because the U.S. paper producer should increase exports, thus making more profit.