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

Compounding or future value concept, Compounding or Future Value Concept: -...

Compounding or Future Value Concept: - Under this process of compounding the future worth of all cash inflows at the end of the time horizon at a particular rate of interest are fo

Advantages and the disadvantages of a new stock issue, What are the advanta...

What are the advantages and the disadvantages of a new stock issue? A new stock issue increases funds and decreases the riskiness of the firm.  It as well tends to send a negat

Cost of Capital, The Nu-Nu Brothers Inc. (NNBI) has the following capital s...

The Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equity 60% NNBI''''s expected net income

Find the impact of price and trading volume, Purpose of research: The a...

Purpose of research: The aims of this research are to examine the effectiveness of speculation on efficiency of Petrochemical sector in Saudi Arabia financial market"TADAWUL".

Show the signs of overtrading, Q. Show the Signs of Overtrading? There ...

Q. Show the Signs of Overtrading? There are a number of usually recognised signs that a company may be overtrading. These are considered mutually with relevant financial data f

Explain difference between business risk and financial risk, What is the di...

What is the difference between business risk and financial risk? Business risk considers to the uncertainty a company has regarding to its operating income (as well termed as ear

Absolute performance standard, Absolute Performance Standard is a method of...

Absolute Performance Standard is a method of measuring an organization's development and how effective and efficient it is at operating its business. The absolute performance stand

Financial asseta and time value of money, assume that risk free rate is 8% ...

assume that risk free rate is 8% and expected rate of return in market is 12%. what is the required rate of return on stock with a beta of 0.8%

Factors affecting investment decisions, I have a question for my homework, ...

I have a question for my homework, which is: Explain, using relevant instances, how investment decisions are affected by different factors. Help please?

Show market risk in systematic risks, Market risk as that portion of total ...

Market risk as that portion of total variability of return caused by the alternating Forces of bull and bear markets. When the security index moves upward haltingly for a signifi

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