Gray, Salter & Radebaugh Chapter 2 GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS   Sidney J. Gray, University of New South Wales   Stephen B.

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Presentation transcript:

Gray, Salter & Radebaugh Chapter 2 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 SOLUTIONS Importing 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’D Importing Goods for Cash Problem

Gray, Salter & Radebaugh Chapter 2 FX RISKS & SOLUTIONS CONT’D Importing 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$/LC exchange rate to get the US$ Price. See Tables 2.1 or

Gray, Salter & Radebaugh Chapter 2 Table 2.1 US Dollar Exchange Rates in Number of Foreign Currency Units Per $ - Thursday October 7, 1999 CountryTodayCountryToday Argentina Peso Australia Dollar Austria Schilling Bahrain Dinar Belgium Franc Brazil Real Britain Pound 1-month forward 3-months forward 6-months forward Canada Dollar 1-month forward 3-months forward 6-months forward Chile Peso China Renminbi Colombia Peso Czech. Rep. Koruna Denmark Krone Ecuador Sucre (Float) Euroland (Euro) Finland Markka France Franc 1-month forward 3-months forward 6-months forward Germany Mark 1-month forward 3-months forward 6-months forward Greece Drachma Hong Kong Dollar Hungary Forint India Rupee Indonesia Rupiah Ireland Punt

Gray, Salter & Radebaugh Chapter 2 FX RISKS & SOLUTIONS CONT’D Importing Goods for Cash

Gray, Salter & Radebaugh Chapter 2 FX RISKS & SOLUTIONS CONT’D Importing Goods for Cash

Gray, Salter & Radebaugh Chapter 2 FX RISKS AND SOLUTIONS Importing 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 FX RISKS AND SOLUTIONS Importing Goods for Credit  Vendors allow you to pay in two-months  however, the Singapore $ and British Pound are floating currencies.

Gray, Salter & Radebaugh Chapter 2 The British Pound Floats

Gray, Salter & Radebaugh Chapter 2 The Singapore $ Floats

Gray, Salter & Radebaugh Chapter 2 Table 2.3 Cost of Motherboards Using Credit Paying FC Two-Months After Purchase on September 28, 2005

Gray, Salter & Radebaugh Chapter 2 Table 2.3 Cost of Motherboards Using Credit Paying FC Two-Months After Purchase on September 28, 2005

Gray, Salter & Radebaugh Chapter 2 FX RISKS AND SOLUTIONS Importing 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 Derivatives Forward 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 2.3 Cost of Motherboards Using Credit Paying FC Two-Months After Purchase on September 28, 2005

Gray, Salter & Radebaugh Chapter 2 Table 2.3 Cost of Motherboards Using Credit Paying FC Two-Months After Purchase on September 28, 2005