International Business Questions
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1. Why is an exporter that is to be paid in six months in a foreign currency worried about fluctuating foreign exchange rates?
2. Are there ways in which this exporter can protect itself? If so, what are they?
3. How does the credit or money market hedge work?
4. Why is acceleration or delay of payments more useful to an IC than to smaller, separate companies?
5. How would you accomplish exposure netting with currencies to two countries that tend to go up and down together in value?
6. Why is the price adjustment device more useful to an IC than to smaller, separate companies?
7. Some argue that translation gains or losses are not important so long as they have not been realized and are only accounting entries. What is the other side of that argument?
8. Is the parallel loan a sort of swap? How does it work?
9. How and why would a seller make a sale to a buyer that has no money the seller can use?
10. Developed country partners in countertrade contracts have had problems with quality and timely delivery of goods from the developing country partners. How are they trying to deal with those problems?
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Solution Summary
Why is an exporter that is to be paid in six months in a foreign currency worried about fluctuating foreign exchange rates?
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1. Why is an exporter that is to be paid in six months in a foreign currency worried about fluctuating foreign exchange rates?
Adverse fluctuation in exchange rates can cause significant differences in the amount expected to receive at the time of transaction versus amount actually received due to rate movements. Therefore, exporter is worried about payment that is to be received after 6 months as adverse rate movements can negatively impact amount of money received by the exporter
2. Are there ways in which this exporter can protect itself? If so, what are they?
Exporter can use a wide range of hedging mechanisms available in the financial markets, such as forward or futures contract, interest rate swaps, put and call options.
3. How does the credit or money market hedge work?
It involves borrowing or lending in different currencies to lock in the home currency value of a transaction in foreign currency.
Example:
Let's say that an exporter in U.S.A is due to receive four million Brazilian reals in one month from a client in Brazil. The business could eliminate uncertainty about the rate of currency exchange by borrowing reals in Brazil at an interest rate of 10 percent per month: The company can convert the reals into U.S. dol-lars at the spot rate. ...
Education
- BCom, SGTB Khalsa College, University of Delhi
- MBA, Rochester Institute of Technology
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