Avicular Controls and Pakistan Airlines

1606 Words Sep 30th, 2014 7 Pages


International projects present multinational corporations with many complexities in organizing a profitable transaction structure.Foreign exchange risk is an underlying problem. Credit risk presents another challenge. Payment terms and the certainty of realizing them can be difficult points. Negotiations with foreign corporations and governments, and with agents and intermediaries, present additional challenges. An example of the demanding environment for global financial activities is presented in the case of "Avicular Controls and Pakistan Airlines". It is found in Cases in International Finance on page 40.


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The black market rate of Rp 50.00/U.S.$ represented a devaluation from the current rate of Rp40.4795/$ of about 23.5%.

There is some uncertainty about the demand for PIA's service in Pakistan, because it is difficult to estimate the impact of the expansion on the demand. Avicular Controls would now be more accessible to Pakistan's consumers, but the precise increase in the demand for cannot be easily forecasted. This demand is affected by future economic conditions and future competition. In addition to these factors, there is much uncertainty about the future exchange rate at which the funds will be converted into dollars. Again, the value of Pakistan's currency has been very volatile over time and has typically depreciated substantially against the dollar. Thus, it would be natural to estimate the dollar cash flows by assuming some degree of depreciation in Pakistan's currency, but there would still be much uncertainty regarding the degree of depreciation.

If ACI were to accept payment in rupee, it would be incurring substantial currency risk. If the payments were to occur on schedule, 20% advance payment upon contract signing and the 80% balance settled 180 days following invoice for completed work in 360 days (180 + 360 = 540 days from the present, contract signing), and no current devaluation were to take place, the present value of the sale was estimated at $18 million. However, if the rupee suffered a 20% devaluation after the advance payment but before

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