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
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
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
Exporters and importers would prefer to set prices in their own currency. Such action