INTERNATIONAL business exam Essay
SECOND EXAM – WINTER 2013
A. Definitions –four will be chosen for the exam
Transaction exposure: The extent to which income from individual transactions is affected by fluctuations in foreign exchange values.
Balance-of-trade equilibrium: Reached when the income a nation’s residents earn from exports equals money paid for imports.
Spot exchange rate: The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day.
Carry trade: A kind of speculation that involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high.
Forward exchange: when two parties agree to …show more content…
2. Assume that you are the CFO for a Canadian producer of aircraft engines and that your company has received an order for 150 engines from an aircraft manufacturer in Australia. It is valued at $20 million Canadian dollars and payment will be due upon delivery of the engines which will occur nine months from now. The customer insists on paying you in Australian dollars. Should you accept these terms? What are the risks in doing so? What options are available to offset any risk?
To avoid risk, it is better not to accept these terms. Seeing that payment will only be due 9 months from now, there is no telling how much the value of the Australian dollar will fluctuate. One of the risks is that the Australian dollar will depreciate over time and that since its value is reduced, the Canadian company will lose out on the Canadian dollar equivalent.
Let’s say for instance that at the time of sale, the Canadian dollar was worth 1.02AUD. The Canadian producer would then expect 20.34 million AUD. From this, they expect a profit of about 9 million after production and delivery costs. However, if 9 months from now, at the time of payment, the value of the AUD falls, meaning that