INTERNATIONAL FINANCE

International Finance



International Finance: Assignment

Question 1

Take today's date as 1/12/10. Brownite Ltd manufactures sports equipment such as rackets in the UK. The Director of Sales is keen to put a proposal together for the Board of Directors to begin to make sales of sports equipment in China. He has asked you to research the following issues in order for him to put his proposal together:

a)Company has had an enquiry for rackets for tennis players in China. The order is for 10,000 rackets which would retail for £100 each in the UK, giving a profit of £30 per racket. The company has to tender for the order by 31st December 2010. If the tender is accepted the goggles would be delivered on 31st May 2011 and payment would be made on 30th June 2011. The Director of Sales is unsure how to price the order. He would want to maintain the company's profit margin.

Answer

To maintain the company's profit margin, the Director of sales should price the order keeping in mind the exchange rate of Chinese Yuan and the Great Britain Pound. The order will be placed in December 2010, while the goods will be delivered in May 2011 and payment will be made on June 30, 2011. The price of the order should justify the price in Yuan, in China, considering the exchange rate prevailing in June 2011. Today, the exchange rate is 1 GBP = 10.10 CNY. Assuming the current trend and advices by the Forex market experts, it is expected that the CNY will appreciate in the future and considering the facts and assumptions, it is supposed that the exchange rate will be 1 GBP = 10.40 CNY in the month of June. So the price in Yuan should be CNY 1040, which will give the profit of CNY 312. These prices will be equivalent to price £100 and the profit of £30 per racket and thus maintain the profit margin of Brownite Ltd.

b) The Director of Sales understands that it is possible to hedge transactions using financial instruments. He would like to know if there are other ways of hedging the company's exchange rate risk if the proposal to expand into China goes ahead.

Answer

International currency exchange transaction is very common in today's global world. Businesses are crossing boundaries and expanding all around the world. Individuals are also going in foreign countries for work. Whenever currency exchange occurs, exchange rate plays a vital role. If the settlement is going to take place at some point in the future, then it involves a great risk from negative movement of exchange rates (Briys and Solnik, 2002, pp. 431-445). To protect your international currency exchange transaction from exchange rate risk, you can choose currency forward contract offered by the online money foreign exchange companies. Currency hedging is needed by both individuals and companies. It is needed when one make a purchase or sale of overseas property, buy any large asset overseas including cars and boats, purchase machinery or raw material for business, ...