Short Business Memo- Foreign Exchange

Short Business Memo- Foreign Exchange

To: The Manager of the Manufacturing Company

From: International Business

Subject: The Importance, Profitability, and Profitability of Foreign Exchange

Greetings,

Any business needs to chase profitability in all its operations. As the international business manager, valuable insight is offered regarding the assessment of three scenarios to clarify the profitability, significance, and viability of considering foreign exchange in operations.

Scenario 1

Spot rate on 1^st April = 3.52 MYR, units sold = 4,000, units equivalent = 1.25 MYR

Cost per unit	MYR 1,250,000 ÷ 4000 =MYR 312.5 per unit
Exchange rate to USD from MYR	MYR 312.5 ÷ MYR3.52 = USD 88.78
Profit per unit USD	USD 90 – USD 88.78 = USD 1.22
Contractual profit	USD 1.22 × 4,000 units = USD 4,888

Scenario 2

Forward Rate	0.317 = 1/USD 0.317 = MYR 3.15
Difference in rate	MYR FUTURE RATE 3.15 –MYR Spot rate 3.13 = MYR 0.02
Amount Per Unit	MYR 1,250,000/4,000 UNITS = MYR 312.5 per unit
Exchange rate from MYR to USD	Unit 312.5 ÷ MYR 3.15 = USD 99.206
Loss per Unit USD	90 – USD 99.206 = (USD 9.206)
Contractual Loss	USD (9.206) × 4,000 units = USD (36,824)

 Scenario 3

In Scenario 3, the risk of foreign exchange is avoided. Bremer et al. (2017) posit that foreign exchange carries risks, including fluctuations in currency exchange rates. Notably, trade agreements and inflation can cause currencies to fluctuate between nations (Röell et al., 2022). In this particular case, the business may think about using a foreign banking system to avoid the negative consequences of currency exchange. Additionally, the company should think about paying MYR when buying raw materials, as this can reduce exchange risk and increase profitability.

Conclusion

After comparing the three scenarios, it is determined that the first scenario is the best choice. Because Scenario 3 enables our company to reduce the foreign exchange risk, it is also a viable option for selection. Because it would place our business in a loss-making position, Scenario 2 is undesirable. It does, however, assist us in determining the point beyond which we will lose money in order to reach MYR 3.48. Therefore, scenario one is thought to be the best.

References

Bremer, M., Hoshi, A., Inoue, K., & Suzuki, K. (2017). Uncertainty-avoiding behavior and Cross-border acquisitions in the Asia-Pacific region. Japan and the World Economy, 41, 99-112.

Röell, C., Osabutey, E., Rodgers, P., Arndt, F., Khan, Z., & Tarba, S. (2022). Managing socio-

political risk at the subnational level: Lessons from MNE subsidiaries in

Indonesia. Journal of World Business, 57(3), 101312.

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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 based on 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 used 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 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.