Western Ex Porters Materials

this is College Material

Appendix Z

Chapter 20 Questions

Answer each of the following questions.

1. Why is an exporter that is to be paid in six months in a foreign currency worried about fluctuating foreign exchange rates?

There is the possibility that the foreign currency will inflate (diminish in value) over the six month period which could result in a lower payment in local currency.

2. Are there ways in which this exporter can protect itself? If so, what are they?

Yes, the exporter can use hedge fund techniques to leverage current currency trading values. For example: a forward hedge would allow the exporter to sell forward contracts as protection from a future fall in prices, and a short hedge would allow the exporter to sell an interest rate contract for future delivery as protection against increases in short-term rates.

3. How does the credit or money market hedge work?

Companies can get a loan in foreign currency in the amount of a specific transaction and then convert it to local currency. When the transaction is complete the loan will be paid in full.

4. Why is acceleration or delay of payments more useful to an IC than to smaller, separate companies?

The effort is to get the money out of the weak currencies and into the stronger currency as quickly as possible.

5. How would you accomplish exposure netting with currencies to two countries that tend to go up and down together in value?

A long position could be taken in the one currency with a short position in the other.

6. Why is the price adjustment device more useful to an IC than to smaller, separate companies?

Price adjustment is a device that can be used on intra enterprise transactions to anticipate fluctuations in currency exchange rates. This is not something that a single entity company could leverage.

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...