I need help with this!!! Please help me with this. You work as an analyst in the
ID: 2440335 • Letter: I
Question
I need help with this!!! Please help me with this.
You work as an analyst in the planning staff of a multinational enterprise. You will be asked by your manager to submit a report on different facets of international business. He/she asks that these reports should be written in a manner that can be forwarded to senior management. These reports should respond to the instructions from your manager.
Instructions: Your firm placed an order with a Chinese firm worth 10 million CNY, and deliverable in 3 months. The agreement with the Chinese firm is that your firm has 3 months to pay after delivery. Keep in mind that your firm is based in the United States and obviously, your financial statements are stated in U.S. dollars. Your manager has asked you to prepare a recommendation on whether the cost of this transaction may be affected by foreign exchange risk and if so, how best to minimize this risk. In your report, you need to identify the spot exchange rate between the two currencies, find information on what direction the exchange rate might be headed in the future, i.e. is the value of the Chinese currency (CNY) expected to move relative to the US dollar over the next year, what is or are the reasons for this projection (so that management can discuss the risks further), and what strategies might be considered by management and what would you recommend. Because this is a financial transaction, make sure you provide the numbers. Your manager wants you to access a reliable site to find the current and forecasted exchange rates, as well as reliable sources to back up your report on how and why the exchange rate between both currencies might move.
Add Sources Please:
Explanation / Answer
The order has been placed with a Chinese firm worth 10 million CNY which will be delivered in 3 months. The payment have to be done by us within 3 months after the delivery. As our financial statement is stated in U.S. dollars so there is a risk associated with the foreign exchange rate. The current exchange rate is USD/CNY 6.77. After 3 months during the delivery, the expected rate is USD/CNY 6.52 ± 0.12. Now, we have 3 months for our payment. So, the expected rates for the next 3 months are :
As we can see that the exchange rate is expected to decrease, i.e. the value of dollar would decrease in China so it is benificial to pay in the first month. The company can also go for a forward exchange contract in which we can the amount anytime within 3 months with a fixed exchange rate.
Date Opening rate Minimum rate November 2018 6.71307 6.71307 December 2018 6.72289 6.71686 January 2019 6.7157 6.68279As we can see that the exchange rate is expected to decrease, i.e. the value of dollar would decrease in China so it is benificial to pay in the first month. The company can also go for a forward exchange contract in which we can the amount anytime within 3 months with a fixed exchange rate.