INT 4-2 Assignment Foreign Exchange

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INT 220 Module Four Assignment: Foreign Exchange Lucy Kelly INT 220 Global Dimensions in Business Dr. Matasha Murrell Jones February 3, 2024

Dear Business Managers, I am responsible for ensuring that our retail stores in Malaysia are profitable. They pay us in their currency, the Malaysian ringgit (MYR), and all sales for quarter one is finalized on April 1 st using the exchange rate at the closing time on that day or the first following business day if April 1 st is on the weekend. Our vendors buy a predetermined amount in advance, so right now, we are under a contract to sell four thousand units for 1.25 million MYR this quarter. In order for us to break even, we must sell each unit for 90 U.S. dollars. I am writing this memo to discuss the profitability, viability, and importance of taking the foreign exchange rate into account. For your information, on January 1, the daily spot rate is 3.13 MYR, and the forward rate is 0.317 U.S. dollars/MYR for April 1st of the same year. On April 1, the daily spot rate is 3.52 MYR. Scenario 1: The company uses the spot rate on April 1st to convert its sales revenue in MYR to U.S. dollars. The spot rate for the Malaysian Ringgit on January 1st is 3.52MYR per U.S. dollar. If we had used the spot rate on April 1 st , which was 3.13MYR, then the exchange rate would be $0.88. I calculated this (1 U.S. dollar x 3.13 MYR) / 3.52 MYR. That means that to calculate the sales revenue, we would multiply 1.25 million by the $0.88 exchange rate. If we use the spot rate on April 1 st to convert the sales revenue from MYR to U.S. dollars, our total revenue would be 1.1 million dollars. That is a loss of 0.14 million dollars. When we look at this calculation, it is clear that it is not a viable option to use the spot rate when trading with Malaysia. It is not profitable

because we need to make $90 per unit instead of $88, and this is the reason it is imperative that we recognize the importance of the exchange rate in our business contracts with other countries. Scenario 2 : On January 1st, the company uses that day’s forward rate today to lock in a foreign exchange rate for its expected 1.25 million MYR in sales. This means the company agreed to exchange 1.25 million MYR using the forward rate on January 1st when April 1 arrives. In this case, if our company uses the forward rate to lock in an exchange rate of 3.17 then the exchange rate would be $0.901 calculated this (1 U.S. dollar x 3.17 MYR) / 3.52 MYR. If we multiply 1.25 million by the $0.901 exchange rate, then our revenue is 1.13 million dollars. $90.1 per unit puts our business just above the break-even point, which means that it is more profitable to negotiate a contractual exchange rate in advance. The forward exchange rate is a more viable option for our company and will help lessen the risk of the fluctuating exchange rate. Such a difference in the exchange rate might seem small, but our financials depend on our careful consideration of the currencies and exchange rates of the countries we trade with. Please understand the importance of this forward rate. Scenario 3 : Another option for the company is to spend the foreign currency and avoid any currency exchange. Because it is a manufacturing company, raw materials are always needed . If our company were to spend the foreign currency instead of using the exchange rate, it would be extremely risky. Raw material prices fluctuate frequently and are hard to predict (Juliano, 2023). As a result of the volatility of these materials, it would not be a viable option to

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use the foreign currency. Prices can change very quickly, so negotiating a forward exchange rate is the safest way for our company to lock in a rate that is mutually beneficial to our business, our suppliers, and our customers. An example of how quickly materials prices can change are the raw materials used in car parts and in toilet paper during Covid-19. The pandemic had a major impact on the automotive industry because steel, aluminum, and copper prices skyrocketed. Similarly, there was a toilet paper shortage, and the production costs went up when the resin (a material used to make toilet paper) costs rose (Ziady, 2021). Although there is always risk involved in international trade, the risk becomes much higher when avoiding the exchange rate because of how quickly those materials' prices can fluctuate. Our company finances will be more stable, and we will save more money if we continue to negotiate the forward exchange rate.

References: Juliano, L., Bender, J. P., Russell, R., & Hughes, D. (2023, January 26). Gauging the risks of raw-material volatility. BCG Global. https://www.bcg.com/publications/2022/gauging- risks-of-raw-material-price-volatility#:~:text=Raw%20materials%20frequently %20experience%20market%20volatility%2C%20often%20resulting,sustained%20supply %20disruptions%20that%20caused%20significant%20price%20increases . Ziady, H. (2021, June 9). The perfect storm making everything you need more expensive | CNN business. CNN. https://www.cnn.com/2021/06/09/business/rising-prices-inventories-post- pandemic/index.html

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