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

Can you explain about overdrafts, Q. Can you explain about Overdrafts? ...

Q. Can you explain about Overdrafts? Overdraft means an agreement with a bank by which a current account-holder is allowed to withdraw more than the balance to his credit up to

Determine the post-merger eps and post-mergershare price, Post-merger EPS a...

Post-merger EPS and post-mergershare price An estimated post-merger EPS can be calculated by: (Combined earnings) / total shares after merger An estimated post-merger s

Show maximum opportunity cost, Q. Show Maximum opportunity cost? If Mar...

Q. Show Maximum opportunity cost? If Marton hedges all its awaited dollar income over the next year at US$1.55: £l this will make guaranteed (ignoring other sources of risk) st

Characteristics and effects of saps, CHARACTERISTICS AND EFFECTS OF SAPS ...

CHARACTERISTICS AND EFFECTS OF SAPS Although SAPs differ somewhat from country to country, they typically have the following features: Reduction in Trade Barriers SAP’s r

What happens when a bank charges discount interest on a loan, What happens ...

What happens when a bank charges discount interest on a loan? When a bank charges reduction in interest on a loan the required interest payment is subtracted from the loan proc

What do you mean by cash flow ratios, Q. What do you mean by Cash Flow Rati...

Q. What do you mean by Cash Flow Ratios? Cash Flow Ratios: - Cash Flow Ratios are an additional device of cash management. Some important cash flow ratios are: (i) Cash Turn

Valuation using multiple discount rates, We have seen computation of presen...

We have seen computation of present value using single discount rate. But the right way to value a cash flow of a bond is to use multiple discount rates, i.e valuing th

Explain investment banks and securities firms, Investment banks and securit...

Investment banks and securities firms Investment banks support corporations or governments in the issue of new debt or equity securities. Investment banking comprises Th

Cases let, How would you judge the potential profit of Bajaj Electronics on...

How would you judge the potential profit of Bajaj Electronics on the first year of sales to Booth Plastics and give your views to increase the profit.

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