Sales managers view on exchange risk, Financial Management

Assignment Help:

The sales manager considers that there will be substantial foreign exchange risk in trading with Werland. Payment is unpaid in Werland francs in three months time. The current sterling equal of the payment of 3 million Werland francs is £10344.83.

Purchasing power parity theory may be utilized to estimate future exchange rates although this theory doesn't provide a perfect estimate of future currency prices especially in the short term.

Presumptuous those current currency relationships are in equilibrium the expected annual change in the value of the Werland franc relative to sterling is

(1.12 -1.03)/ 1.03= 0.0874 or an 8.74% deflation of the Werland franc in a three month period this is approximately 2.18%.

The present spot rate for the purchase of Werland francs is Wf290/£

The expected rate in three months is found from (X - 290)/ 290= 0.0218

   X = 296.32

At this expected rate the sterling payment would be 3000000/296.32= £10124.19

Although exchange rate risk surely exists for the Werland transaction the probable movement in exchange rates is beneficial to Vertid Ltd and will result in less sterling being paid than at the current spot rate. This is obviously by no means certain as the spot rate in three months time could differ significantly from the expected rate.

The sales manager expects small exchange risk in trading with Thodia as the Thodian peso is linked to the US$. Nevertheless the US$ floats freely against£. Utilizing purchasing power parity the dollar is expected to depreciate annually by: (1.06 -1.03)/ 1.03 = 0.0291 or 2.91% relative to sterling In six months this is a depreciation of approximately 1.46% leading to a rate for the sale of dollars in six months of 1.469*1.0146 = $1.4904/£ making the expected receipts from Vertid a little less in sterling terms. Thus Vertid would suffer a foreign exchange loss.

A greater hazard is that the Thodian currency might break its link with the dollar or devalue against the dollar. There is a importance chance of this as inflation is 20% in Thodia and only 6% in the US making it very difficult for the Thodian currency to maintain the existing currency exchange rate relative to the dollar. What isn't known is whether any significant change in the Thodian peso/US$ relationship will occur within the next six months.

The sales manager isn't correct. Regardless of the current link with the US$ the transaction with Thodia exposes Vertid Ltd to significant foreign exchange risk.


Related Discussions:- Sales managers view on exchange risk

What is the rationale of the double-play strategy, Q. What is the rationale...

Q. What is the rationale of the double-play strategy? Hedge Fund enters agreement to sell HK$ in six month's. At expiration the Hedge Fund requires to buy spot HKD and deliver

The beta of a firm, Suppose the market portfolio is equally likely to incre...

Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%. a.    Calculate the beta of a firm that goes up on average by 43% when the market goes up a

Define the meaning of objective - financial management, Define the meaning ...

Define the meaning of objective - financial management The term objectives offers a normative framework. That is the focus in financial literature is on what a firm must try to

State the different accounting policies, State the different accounting pol...

State the different accounting policies Different accounting policies which can be adopted will have an influence on the ratios calculated and hence make comparisons more diffi

Minimum bonus and maximum bonus, Question 1 Sections 42 to 50 of the Act d...

Question 1 Sections 42 to 50 of the Act deal with provisions pertaining to welfare of workers. State a few welfare measures that you would suggest in factories. List the welfare m

Explain and compare forward vs. backward internalization, Explain and compa...

Explain and compare forward vs. backward internalization. Forward internalization takes place when MNCs with intangible assets make FDI in order to use the assets on a larger sca

Accrual bond, It is a bond that does not give periodic interest payments. I...

It is a bond that does not give periodic interest payments. In spite of that, interest is added to the principal balance of the bond and is either paid at maturity or, at some poin

Tests for consistency, Tests for Consistency The consistency of the ind...

Tests for Consistency The consistency of the index numbers have been tested over the years. The most important of these tests are: The time reversal test The

Illustrate the meaning of gearing, Illustrate the meaning of Gearing G...

Illustrate the meaning of Gearing Gearing is the relationship between equity anddebt. Debt is typically long term liabilities that the organisation has. Equity is all the shar

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd