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Exchange Rate Considerations

Please help me address the following case:

Mr. Swanson has expressed confusion about how foreign exchange rates will affect Content Cow Dairy if it expands to international markets. You tell Mr. Swanson that he has raised a good question and that you will draft and send him a report with information on this topic.

In your report, include the following:

- Compare/contrast the risks and benefits of pricing goods in U.S. dollars or pricing goods in local currency when selling in a foreign market.
- Explain rate parity theory and how it is used to predict future exchange rates.
- Calculate the current Forward Exchange Rate for the United States and Egypt. (Show your calculations).
- Explain the relationship between monetary policy, interest rates, and exchange rates.
- Briefly introduce other factors that influence exchange rate fluctuations. Address whether any of these are a factor when looking at the future exchange rate between the United States and Egypt.

Solution Preview

Introduction
It is necessary to analyze the impact of foreign exchange rates on firm's performance before expanding the business into international markets. Mr. Swanson has also expressed his confusion in this concern and this report will help him to clear his confusion. This report includes various explanations such as similarities and differences between the risks and benefits of pricing goods in U.S. dollars or pricing goods in local currency when selling in a foreign market, rate parity theory, calculation related to the current forward exchange rate for the United States and Egypt, the relationship between monetary policy, interest rates, and exchange rates and other factors that influence exchange rate fluctuations.
Compare and Contrast Risk and Benefits
Different risks are associated of pricing goods in U.S. dollars when selling in a foreign market. Pricing in U.S. dollar requires that customers manage the process of currency exchange. At the same time, pricing in $U.S. is also associated with currency fluctuations (Brealey, Myers, Myers & Brattle Group, 2003). It can also cause to loss of potential customers as well as negative brand image. It is because when a foreign customer asked the price of product, it is difficult for the marketer to tell exact price of the product when pricing in U.S. $.
On the other hand, different benefits can be attained by pricing goods in local currency. There is no need to generate any hedge factors for possible currency fluctuations as well as consideration of exchange rate. Further, it will help ...

Solution Summary

The solution discusses about exchange rate considerations.

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