The idea is for you to forecast the value of a foreign currency in order to comp

Question

The idea is for you to forecast the value of a foreign currency in order to complete a transaction. You will need to choose from the following list of currencies as your subject for the case.

UK Pound

Brazilian Real

Thailand Bhat

You represent a US based business involved in an international (cross-border) purchase. In order to complete your purchase you will need one million in foreign currency (UK Pounds/Brazilian Real/Thailand Bhat)

1. What will is the value of your transaction today? (How many dollars would you need today?)

2. What is the value of your transaction in 30days? (How many dollars would need then?) To determine this you must forecast the exchange rate. What factors did you consider to make this forecast?

3. What action will you take today? Why?

Explanation / Answer

1. What will is the value of your transaction today? (How many dollars would you need today?)

Solution-

A United States (U.S.) based company would like to start an international business of shipping of some luxury electronic goods like; Television, mobiles, computer appliances, etc. to brazil where they would export such electronics appliances to Brazil. They have fulfilled all the agreement which comes under this cross-border dealing However, company must have to know about the business expansion which they initially like to begin with Brazil i.e. what would they want to invest on this business.

I think in beginning for this small start-up, its fine to go with R$2 million (Brazilian Real) i.e. company would have to invest for its initial transaction as US$88,0000 (USD) as we know today’s exchange or transaction rate as:

R$ 1= US$ 0.44

R$2 million= $ 0.44* (2 million) = US$88, 0000

2. What is the value of your transaction in 30days? (How many dollars would need then?) To determine this you must forecast the exchange rate. What factors did you consider to make this forecast?

Solution-

There are many ways to forecast the Brazil exchange rate in next days where it depends upon following conditions as discussed below:

0.4% (Percent) - 0.2% (Percent) =0.2%

This means that prices in U.S. is expected to rise faster relatively in Brazil. For such situation, PPP approach would forecast as the U.S. dollar would have to depreciate by approximately 0.2% to keep prices between both of these countries relatively equal. So, if the current exchange rate was 44 cents U.S. per one Brazil real, then the PPP would forecast an exchange rate of:

(1 + 0.002) x (US $0.44 per R$1) = US $0.441 per R$1

Means that it would be R$ 1 = 44.1 cents U.S. or US$ 44.1.

3. What action will you take today? Why?

Solution-

This scenario as be counted above assumed expected exchange rate where it would have minor effect in business where ultimately it would be beneficial for the company as USD getting stronger in market. But if it would get down then obviously the currency of Brazil real would get rise then company have to take some actions for controlling the value of its products or services as company could handle such situation by taking some initiatives as;

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