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Instructions of INT 220 4-2 Assignment
4-2 Assignment: Foreign Exchange
Overview
Foreign exchange impacts the profitability of transactions in international markets. It can turn a profitable business into one that loses money and can turn an unprofitable business into one that makes money.
In this assignment, you will analyze the impact of foreign exchange on different business scenarios and present your findings in a short business memo.
Scenario
You manage the international business for a manufacturing company. You are responsible for the overall profitability of your business unit. Your company ships your products to Malaysia. The retail stores that buy your products there pay you in their local currency, the Malaysian ringgit (MYR). All sales for the first quarter are paid on April 1st and use the exchange rate at the close of business on April 1st or the first business day after April 1st if it falls on a Saturday or Sunday. The company has sales contracts with different vendors that determine the number of units sold well in advance. The company is contractually obligated to sell 4,000 units for exactly 1.25 million MYR for the first quarter. The break-even point for each unit is $90 in U.S. dollars. Use the following foreign exchange rates:
On January 1, the daily spot rate is 3.13 MYR, and the forward rate is 0.317 U.S. dollars/MYR for April 1st of the same year.
On April 1, the daily spot rate is 3.52 MYR.
Prompt
Using the information above, create a short business memo that explains the profitability, viability, and importance of considering foreign exchange on the basis of the scenarios below.
Scenario 1: The company uses the spot rate on April 1st to convert its sales revenue in MYR to U.S. dollars.
Scenario 2: On January 1st, the company uses that day’s forward rate today to lock in a foreign exchange rate for its expected 1.25 million MYR in sales. This means the company agreed to exchange 1.25 million MYR using the forward rate on January 1st when April 1 arrives.
Scenario 3: Another option for the company is to spend the foreign currency and avoid any currency exchange. Because it is a manufacturing company, raw materials are always needed.
Specifically, you must address the following rubric criteria:
Foreign Exchange Calculations: Determine the profitability of the international business by using foreign exchange calculations for the first and second scenarios.
Spend or Save: Discuss what you would need to consider when determining if the company should buy raw materials with the foreign currency in an effort to avoid foreign exchange risk and whether this is a viable option for the company.
Conclusion: After determining the result for each scenario, explain the importance to a company’s financial results of considering foreign exchange risk.
Guidelines for Submission
Submit this assignment as a 250- to 300-word Microsoft Word document. Sources should be cited according to APA style.
Step-By-Step Guide of INT 220 4-2 assignment: Foreign Exchange
Introduction to INT 220 4-2 Assignment
In INT 220 4-2 assignment: foreign exchange, we are instructed to write a short business memo to analyze the impact of foreign exchange. That explains the profitability, viability, and importance of considering foreign exchange based on the scenarios provided in the INT 220 4-2 assignment foreign exchange. You will add the points explained in the memo.
Determine the profitability of the international business by using foreign exchange calculations for the first and second scenarios.
Scenario Analysis
In the first section of the 4-2 assignment on foreign exchange, we will discuss the profitability of International Businesses.
- Briefly introduce the concept of foreign exchange and its importance to international business operations, especially for manufacturing companies dealing with transactions in foreign currencies.
- Understand the intricacies of foreign exchange (FX).
- Demystify the impact of FX movements on our operations by focusing on transactions with Malaysia.
- Scenario 1: “The company uses the spot rate on April 1st to convert its sales revenue in MYR to U.S. dollars.”
- Scenario 2: “On January 1st, the company uses that day’s forward rate today to lock in a foreign exchange rate for its expected 1.25 million MYR in sales.”
- Scenario 3: The company considers using foreign currency directly to purchase raw materials to avoid currency exchange risk.
Foreign Exchange Calculations
To assess profitability, let’s dive into the math for Scenarios 1 and 2:
- For Scenario 1, we use the April 1st spot rate of 3.52 MYR to convert our sales revenue back to U.S. dollars.
- In Scenario 2, we lock in the forward rate of 0.317 U.S. dollars/MYR as of January 1st for our April sales.
Foreign Exchange Calculations
Scenario 1: Using the April 1st spot rate of 3.52 MYR to convert sales revenue back to U.S. dollars, we calculate:
1.25 million MYR / 3.52 MYR per USD = $354,545.45 USD.
Scenario 2: Locking in the forward rate of 0.317 USD/MYR as of January 1st for April sales, the revenue conversion is:
1.25 million MYR * 0.317 USD/MYR = $396,250 USD.
Discuss what you must consider when determining whether the company should buy raw materials with foreign currency to avoid foreign exchange risk and whether this option is viable.
Spend or Save
Now, let’s dive into this next segment of the INT 220 4-2 assignment: foreign exchange. Here, we will discuss whether the company should buy raw materials with foreign currency to avoid foreign exchange risk.
When pondering whether to spend the foreign currency on raw materials or save it, consider:
- The current and expected exchange rates.
- The cost and availability of raw materials needed.
- The potential savings or costs associated with avoiding foreign exchange risks.
Conclusion
Ultimately, we will provide the key findings of the INT 220 4-2 assignment: foreign exchange.
- A proactive approach to managing FX risk—not just through hedging strategies like forward contracts but also operational decisions like using foreign currency earnings to purchase raw materials—can safeguard our profitability.
- Currency fluctuation underscores the importance of integrating FX risk management into our financial planning and decision-making processes.
- Navigate the complex world of international business and ensure your company’s financial health against an ever-evolving global economic landscape.
Closing
This Owlisdom How-To INT 220 Guide provides all the required information and guidance for writing the business memo asked in the INT 220 4-2 assignment: foreign exchange. Calculate the conversion numerically according to your assignment’s data and exchange rates. Good luck 🙂
You can also read our INT 220 next module, 5-1 Discussion on Data Privacy Considerations.
FAQs
- How did foreign exchange rates affect our Q1 profitability in Malaysia? Unfavorable rates led to a loss in Scenario 1, while locking in a forward rate in Scenario 2 resulted in profit. Refer to the 4-2 Assignment: Foreign Exchange for details.
- Can spending foreign currency on raw materials reduce exchange risk?this approach can mitigate exchange risk, but it requires an analysis of material needs and price advantages. INT 220 4-2 Assignment provides further insight.
