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GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS. Sidney J. Gray , University of New South Wales Stephen B. Salter , University of Cincinnati Lee H. Radebaugh , Brigham Young University. CHAPTER TWO. FOREIGN CURRENCIES AND EXCHANGE RISK MANAGEMENT.
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GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS • Sidney J. Gray, University of New South Wales • Stephen B. Salter, University of Cincinnati • Lee H. Radebaugh, Brigham Young University Gray, Salter & Radebaugh Chapter 2
CHAPTER TWO FOREIGN CURRENCIES AND EXCHANGE RISK MANAGEMENT Gray, Salter & Radebaugh Chapter 2
FOREIGN EXCHANGE RISKS AND SOLUTIONSImporting for Cash Problem • Let’s explain with an example. • Your firm, Alamo Computers of San Antonio, Texas, USA, wishes to buy some computer motherboards. • Here are three suppliers with prices in their local currency. Gray, Salter & Radebaugh Chapter 2
FX RISKS & SOLUTIONS CONT’DImporting Goods for Cash Problem Gray, Salter & Radebaugh Chapter 2
FX RISKS & SOLUTIONS CONT’DImporting Goods for Cash Problem • What do we do now? • Calculate the price in a common currency (US$ would be logical since you are US based company). • How do we do that? • Get the price in local currency (LCP) for each location from the table. • Divide the LCP by the LC/US$ exchange rate or multiply the LCP by the US$/LC exchange rate toget theUS$ Price. • See Tables 2.1 or www.oanda.com. Gray, Salter & Radebaugh Chapter 2
Table 2.1US Dollar Exchange Rates in Number of Foreign Currency Units Per $ - Thursday October 7, 1999 Gray, Salter & Radebaugh Chapter 2
FX RISKS & SOLUTIONS CONT’DImporting Goods for Cash Gray, Salter & Radebaugh Chapter 2
FX RISKS & SOLUTIONS CONT’DImporting Goods for Cash Gray, Salter & Radebaugh Chapter 2
FX RISKS AND SOLUTIONSImporting Goods for Credit • What if you want to buy on credit? • Will the exchange rate stay the same? • Is Singapore still the cheapest supplier? Gray, Salter & Radebaugh Chapter 2
Vendors allow you to pay in two-months however, the Singapore $ and British Pound are floating currencies. FX RISKS AND SOLUTIONSImporting Goods for Credit Gray, Salter & Radebaugh Chapter 2
The British Pound Floats Gray, Salter & Radebaugh Chapter 2
The Singapore $ Floats Gray, Salter & Radebaugh Chapter 2
Table 2.3Cost of Motherboards Using Credit Paying FC Two-Months After Purchase on September 28, 2005 Gray, Salter & Radebaugh Chapter 2
Table 2.3Cost of Motherboards Using Credit Paying FC Two-Months After Purchase on September 28, 2005 Gray, Salter & Radebaugh Chapter 2
FX RISKS AND SOLUTIONSImporting Goods for Credit • Can you protect yourself from fluctuations in the exchange rate? • You can neutralize the risk of FC changing in value by using a derivative. • Derivative is • a contract whose value in local currency changes • with price movements in related commodity or financial instrument such as a foreign currency • Foreign Exchange (FX) Derivatives can include forward contracts, futures, swaps and options. Gray, Salter & Radebaugh Chapter 2
Derivatives Forward Contracts • Forward Contract • contract between a foreign currency trader and a client • for the future sale or purchase of foreign currency at a forward rate. • Forward Rate • contractual rate between the FX trader/client for the amount of currency A needed to acquire one unit of currency B at a fixed future date. (Table 2.1) Gray, Salter & Radebaugh Chapter 2
Derivatives - Forward Contracts September 28, 2005 British Pound Per Dollar: • Spot .5560 • One Month Forward .5847 • Two Months Forward .5848 • Three Months Forward .5848 Gray, Salter & Radebaugh Chapter 2
DerivativesForward Contracts • Table 2.3 shows the impact of applying the information on forward exchange rates to the purchase of motherboards. Gray, Salter & Radebaugh Chapter 2
Table 2.3Cost of Motherboards Using Credit Paying FC Two-Months After Purchase on September 28, 2005 Gray, Salter & Radebaugh Chapter 2
Table 2.3Cost of Motherboards Using Credit Paying FC Two-Months After Purchase on September 28, 2005 Gray, Salter & Radebaugh Chapter 2