BSB119 T W10

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Department
Management and Human Resources
Course Code
BSB119
Professor
All

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1 BSB119 – GLOBAL BUSINESS TUTORIAL 10: FORIEGN EXCHANGE AND FINANCE  This topic, historically does come up in the final exam  Question 1 is not as comment  Question 2 -4 = best exam practice questions 1. You are assigned the duty of ensuring the availability of 500,000 Chilean pesos for payment that is scheduled for next month. Your company possesses Australian dollars $AUD; you identify the spot and forward and exchange rates. What factors affect your decision in using spot versus forward exchange rates?  Spot exchange rate: current exchange rate in the market.  Forward exchange rate: is the exchange rate calculated today based on the future exchange rate in a certain defined period eg in 3/6 months time. Very risk. o Look at the trend in the market. Based on normal forecasts in the market, exchange rate will be x in y days. o Therefore, two parties agree in a certain period of time that Company A pays Company B x amount of money. o Company B then know how much they are selling/buying the product for – everyone knows. Eliminates the risk. o This is the process of hedging – covers yourself Approximately 1AUD = CLP 490 Therefore, 500,000 = AUD1020  Given the small amount of money, may look at the spot and forward exchange rates and if there is a expectation that there will be a dramatic appreciation in the Chilean Peso could be worth buying on the spot market or if the Chilean peso is forecast to deprecate against the AUD, delay the purchase.  Unless there is predicted to be a major shift, one would expect they should delay. Unless for example, the economic situation changes greatly, the dollar should only fluctuate minimally. Would not be worth the effort –too costly compared to what you could possibly lose.  Fluctuation is the major factor of exchange rates. They are not stable – the chance of making a considerable gain/loss is high. 2 From the Driza-Bone video you have seen in the lecture, answer the questions that follow. (If you missed the lecture, a copy of the video is available via the Blackboard site.) 2. Why might an exporter such as Driza-Bone wish to keep the foreign currency price of their product in the foreign market fairly stable? Prices set in Producer/Exporters Exchange Rate US importer/distribution ex factor Price price paid 1 AUD AU400 AU1=US0.40 160 2 AU AU400 AU1-US0.80 320  Comparing scenarios 1 and 2 if the AU dollar fell in value, the US price of coats could be dropped and Driza-Bone would still earn a profit.  There are several reasons why Driza-Bone may not drop the US price. First a drop in the price of the coast may lead to a loss of revenue because the market for coast may not be responsive to price changes. Hence, to reduce the price would simply forgo revenue opportunities.  Second, if prices are lowered it may be difficult to raise them again when exchange rate conditions change. Driza-Bone would have limited impact in the US retail sector  Third, the US distributors may not pass the price reduction, instead of pocketing for themselves the price difference.  Fourth, frequent adjustments to price coinciding with frequent adjustments in the foreign exchange rate add significant to the transactions costs down the channels of distribution and are disliked by distributors, retailers and customers. o Expensive and confusing – middle man will take a percentage. It is not worth it. o Result in old and new stock on the shelves all at different prices despite being the same item. It is hard to sell the newer stock when the prices are different.  Prices are kept stable to avoid this. 3. Under what circumstances is it better to set prices in (a) home country currency; and (b) host country currency?  Exporters and importers would prefer to set prices in their own currency. Such action rem
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