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Analyzing the impact of fluctuations in currency values

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Analyze the following and report on your conclusions:

a. At the current exchange rate of $1.40 per euro, a company sells 5 million bouters to the European Community (EC) at $100 per bouter.

i. What will happen to this company's sales if the dollar appreciates by 15 percent?

ii. What will happen to the company's sales if the dollar depreciates by 10 percent?

b. At the current exchange rate of 120 yen per dollar, a company buys 100,000 cell phone chips per month from Japan at 500 yen per chip.

i. What will happen to this company's expenses if the yen appreciates by 10?

ii. What will happen to the company's expense if the yen depreciates by 15 percent.

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Solution Summary

The solution analyzes the impact of fluctuations value of foreign currency on revenue and expanses.

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a. At the current exchange rate of $1.40 per euro, a company sells 5 million bouters to the European Community (EC) at $100 per bouter.

i. What will happen to this company's sales if the dollar appreciates by 15 percent?

Total sales at current level of exchange rate=5*100/1.40=357.14 million Euros
New exchange rate=1.40/(1+15%)=$1.217 per Euro
Total sales at new level of exchange rate=5*100/1.217=410.85 million Euros
Change in sales=(410.85-357.14)/357.14=15%
Value of sales will ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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