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

Principle of opportunity cost, Suppose you have recently been contracted as...

Suppose you have recently been contracted as a financial consultant to a London-based engineering company, Alpha Products Plc. The company uses three components as part of their pr

Meaning of working capital, Problem 1 What are the characteristics of s...

Problem 1 What are the characteristics of small business? Describe the various forms of organisation under which small business operate. Characteristics List the vari

Miller-Orr model, Beta plc sets its minimum cash balance as $1,000.00 & eas...

Beta plc sets its minimum cash balance as $1,000.00 & eastimates the following transaction cost sale/purchase =$12 standrsa deviation =$1,200 per day Interest rate =14.6% p.a or 0

Working capital as a percentage of total assets, Q. Working Capital as a Pe...

Q. Working Capital as a Percentage of Total Assets? This approach of estimation of working capital requirement is based on the fact that the total assets of the firm arc consis

Price-yield relationship in bonds, Typically in a bond, we find...

Typically in a bond, we find an inverse relation between the price and the required yield. We know that the price of the bond is the present val

Duration, Now that we have an understanding about price volatility ...

Now that we have an understanding about price volatility characteristics of a bond, let us turn to the duration/convexity approach, which is an alternative

Give subject matter of participation, Q. Give subject matter of participati...

Q. Give subject matter of participation? Subject matter of participation by and large the workers interests in participation varies with the nature of issues' involved in parti

Company default rate on account receivable when its too low, Can a company ...

Can a company have a default rate on its accounts receivable that is too low?  Explain. A company might have a default rate on AR that would be considered too low if by liberal

Capital budgeting, identify and explain the key stages in the capital inves...

identify and explain the key stages in the capital investment decision-making process and the role of investment appraisal in this processs..

Collar, Collar A collar can be established by holding a share, along w...

Collar A collar can be established by holding a share, along with purchasing a protective put and writing a covered call, where both options at out-of-money.. For Example

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