INT 220 Assignment 4-2

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May 29, 2024

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Southern New Hampshire University Foreign Exchange INT 220 Assignment 4-2 [Author name] 7-23-2023

International Business Manager 07/23/2023 Subject: Impact of Foreign Exchange on Profitability and Viability of International Business Dear professionals, I am writing to provide an analysis of the impact of foreign exchange on our company's international business, specifically in the context of three scenarios related to our sales in Malaysia. Scenario 1: Spot Rate on April 1st In this scenario, we use the daily spot rate on April 1st to convert our sales revenue in MYR to U.S. dollars. Let's calculate the profitability: Total Sales Revenue in MYR: 1,250,000 MYR Spot Rate on April 1st: 3.52 MYR/USD Total Sales Revenue in USD: 1,250,000 MYR / 3.52 MYR/USD = $355,681.82 USD The cost of goods sold (COGS):

Total Units Sold: 4,000 units Break-even Point per Unit: $90 USD Total COGS: 4,000 units * $90 USD = $360,000 USD Profitability in Scenario 1: $355,681.82 USD - $360,000 USD = -$4,318.18 USD In this scenario, using the spot rate on April 1st results in a loss of $4,318.18 USD, turning what should have been a profitable business into a loss-making one. Scenario 2: Forward Rate on January 1st Here, we lock in a foreign exchange rate for our expected 1.25 million MYR in sales using the forward rate on January 1st. Total Sales Revenue in MYR: 1,250,000 MYR Forward Rate on January 1st: 0.317 USD/MYR Total Sales Revenue in USD: 1,250,000 MYR * 0.317 USD/MYR = $396,250 USD Profitability in Scenario 2: $396,250 USD - $360,000 USD = $36,250 USD Using the forward rate on January 1st leads to a profit of $36,250 USD, ensuring the viability of the business.

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Scenario 3: Spending Foreign Currency on Raw Materials The option to spend foreign currency directly on raw materials helps avoid foreign exchange risk. However, we need to consider certain factors: Currency Fluctuations: Foreign currency rates may change before we make the purchases, affecting the costs of raw materials. Supplier Agreements: Are our suppliers willing to accept payment in foreign currency? If not, we might need to exchange currency, incurring transaction costs. Hedging Strategies: We can explore hedging strategies to mitigate exchange rate risk and ensure stability in raw material costs. Conclusion Considering foreign exchange risk is of paramount importance to a company's financial results, as demonstrated by the varying profitability in different scenarios. Exchange rate fluctuations can turn profitable businesses into losses or vice versa. Locking in a favorable exchange rate through forward contracts can offer stability and enhance profitability. Carefully evaluating the viability of spending foreign currency on raw materials is essential to manage foreign exchange risk. In light of these findings, I recommend adopting a comprehensive foreign exchange risk management strategy that involves using forward contracts and hedging to secure favorable rates and protect our company's financial performance.

Please let me know if you require any further information or clarification on this matter. Thank you for your attention. Sincerely,

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