Introduction Those organizations wishing to engage in international business transactions have many elements they must consider. One of these elements is that of foreign exchange rates, the rate at which one currency can be converted into another (Hill, 2014, p. 296). While a company may be located in the United States, they may engage in commerce with organizations in foreign markets that require payment in their domestic currencies. Organizations must pay careful attention to these exchange rates, as their fluctuations can significantly impact the costs of doing international business, as demonstrated in the first section. While exchange rates are determined by the supply and demand of currencies on the foreign exchange market …show more content…
Identify the spot and forward exchange rates between the two currencies. What factors influence your decision to use each? Which one would you choose? How many dollars must you spend to acquire the amount of yen required? This organization wishes to limit its transaction exposure when paying its Japanese supplier in six months. This exposure reflects how the cost of this transaction is affected by foreign exchange price fluctuations (p. 313). Because the exchange rate is expected to fluctuate during this period, the ¥1,000,000 will payment will cost the organization differing amounts depending on which exchange rate is used for the conversion of the domestic currency into the Japanese Yen, which will impact the organizations profit margins. There are two options for this conversion, the spot exchange rate and the forward exchange rate. The spot exchange rate is the currency conversion rate on a specific date (p. 298). As of May 28, 2016, the spot exchange rate for the conversion of U.S. dollars into Japanese yen is $1=¥110.36 (USD/JPY - US Dollar Japanese Yen , n.d.). If the organization chose to convert its domestic currency into Yen on this date, the organization would be required exchange $9,061.26 (rounded up) to fulfill the ¥1,000,000 requirement. An alternative to this rate is the forward exchange rate. This rate is the currency exchange rate governing transactions that occur in the
Exchange Rates: The Exchange Rates are other important global factors for which company’s ultimate revenue is affected. For example sudden major change in the Exchange rate of UK with other countries is a great threat or facility for TESCO PLC business.
11. Describe at least three exchange rate factors that are likely to attract foreign investors to a country 's currency. Explain why these factors are attractive for foreign investors. (3-6 sentences. 3.0 points)
* Exchange rates may affect profitability on the business if they are sourcing materials (all the ingredients used to
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Exchange rates play a pivotal role in the relationships between individual economies and the global economy. Almost all financial flows are processed through the exchange rate, as a result the movements and fluctuations of the exchange have a significant impact on international competitiveness, trade flows, investment decisions and many other factors within the economy. Due to the increasing globalisation of the world economy, trade and financial flows are becoming more accessible
i. DEFINITION: a number of affiliated businesses which function simultaneously in different countries, are joined together by ties of common ownership of control, and are responsible to a common
Fluctuations in foreign exchange rates may have an adverse impact on profitability and cause cash flow to be somewhat unpredictable for budget planning purposes.
In the case of appreciation of the yen, the following impacts could occur to Japanese firms
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.
Given the nature of its business, Jaguar is faced with three types of exchange rate exposure (1) Transaction, (2) Translation and (3) Economic . Transaction exposures arise whenever the firm commits (or is contractually obligated) to make or receive a payment at a future date denominated in a foreign currency. Translation exposures arise from accounting based changes in consolidated financial statements caused by a change in exchange rates. In this case we primarily focus on the Economic exposure -also known as Operating exposure or Competitive exposure- of Jaguar.
2. At the current spot rate (ask) of 236.90 this converts to $ $102,401,117.83 This is the present value of the yen cash flows at 7.1%. RJR’s dollar payments are then set at 10.92% of this value. These numbers are shown below:
Example: U.S. Exporter agrees in a contract to sell beef to a buyer in Japan for ¥500 / lb. in 6 months. If the e = ¥100 / $, the U.S. exporter receives $5/lb. If e = ¥80 / $, (dollar weakens, Yen strengthens), the exporter gets $6.25/lb. If e = 125Yen/$ (dollar strengthens, Yen weakens) he gets $4/lb. Range for the sales revenue is between $4.00-6.25/lb. Currency risk for the exporter is that the Yen could weaken over the next six months, dollar strengthen. RISK FOR EXPORTER: They are receiving a fixed amount of foreign currency in the future, they are worried about the foreign currency getting weaker in the future, meaning fewer dollars in the future for the sale of the exported product.
Aspen has become a public company with more risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that
Economic and the currency: first of all, every business is trying to avoid risk, therefor, the economic status of a foreign country is what the company looking for, they want the low unemployment rate, inflation rate and stable economic environment. Furthermore, the currency difference will change the product price strategy.