1. 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

2. Gray, Salter & Radebaugh Chapter 2 CHAPTER TWO FOREIGN CURRENCIES AND EXCHANGE RISK MANAGEMENT

3. 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.

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

5. 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 www.oanda.com.

6. 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 0.9998 1.5196 12.845 0.377 37.657 1.934 0.6054 0.6051 0.6053 1.4709 1.4699 1.4669 1.4644 530.85 8.2778 1994.5 34.3 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 6.9435 14600 0.9334 5.5503 6.1233 6.1088 6.0636 5.9809 1.8258 1.8214 1.8079 1.7833 306.62 7.7686 241.04 43.55 7775 0.735

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

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

9. 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?

10. 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.

11. Gray, Salter & Radebaugh Chapter 2 The British Pound Floats

12. Gray, Salter & Radebaugh Chapter 2 The Singapore $ Floats

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

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

15. 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.

16. 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)

17. 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

18. 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.

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

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