You are an investor and are lo

Youare an investor and are looking for opportunities where you caninvest or short sell in the coming 3-5 years (you have a medium toa long term horizon) . You are certain that Donald Trump will tryand reduce the trade deficit. Given this piece of information, youbelieve that this would impact MNC corporations, hence you startlooking at the MNC (Apple). Variables that you believe are key andmight change are the following: relative strength of the dollar,tariffs on imports, incentives on exports, taxes on corporations.Make assumptions about these variables (increase/decrease) and howthey will impact the MNC. What is you final recommendation go Longor Short the MNC?

Answer:

Trade deficit or surplus is computed by subtracting the value ofimports from value of exports. Trade balance is said to be indeficit when then the value of imports is more than the value ofexports. If the trade balance is in surplus, then value of exportsis more than value of imports.

In given case, Donald Trump is thinking on reducing the Tradedeficit. Trade deficit can be reduced in two manner- increasingexports and reducing imports. In order to increase exports, Trumpadministration will provide incentives on exports but will beimposing more tarrifs on imports. Also taxes on corporation will behigher to compensate for the trade deficit. As the trade deficitwill become narrow, the US will strengthen in comparison to othercountries and hence will appreciate over a period of time.

A company like Apple which has a global operations stands tolose from this move of Trump Adminsiatration. Apple does receivemajority of its earnings from outside and appreciation of dollarwill have a negative impact on Apple. Also it will hamper itsglobal sales volume as the products will become dearer in othercountries thereby reducing demand.

Hence the final recommendation will be to go Short for an MNClike Apple.


 
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