Foreign Exchange Market and International Monetary Exchange Issues You are the p

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Foreign Exchange Market and International Monetary Exchange Issues

You are the purchasing manager for Aurora Inc, a USA international corporation that will be adding new facilities in the USA. For this expansion you will need in addition to other materials, 10,000 running feet of knotty pine lumber next year.

Without considering transportation, duty, insurance and taxes assume the following cost:

Cost to purchase the lumber in the USA = $20,000

Cost to Purchase the lumber in Argentina = 57,000 Argentine Pesos

Cost to purchase the lumber in Mexico = 225,000 Mexican Pesos

Where will you purchase the lumber all other factors being equal?

Now, your logistics department (a little late) informs you of the following:

Transportation, insurance, duty and taxes for shipment from Argentina will add 40% to the cost of the product delivered to the USA plant.

Transportation, insurance, duty and taxes for shipment from Mexico will add 10% to the cost of the product delivered to the USA Plant.

Where will you now Purchase the lumber?

Finally, even later (which it seems is always how it happens) but better late than never, your finance department tells you to expect an inflation rate of almost 30% in Argentina next year and 5% in Mexico next year.

Will this affect you decision, if so, how and why? Two important considerations to be aware of in this scenario:

Inflation is country specific

The contract will be written this year for delivery and payment next year.

Based on the information available, what assumptions would you make, what currency would you prefer and what sales terms would you recommend?

Currency can be converted by either method of multiplication or division using the March 2012 exchange rate table. Convert the currency using only this table. (click here)

Explanation / Answer

1. Without considering Transportation, duty, insurance and taxes assume the following cost:

From where will you purchase the lumber all other factors being equal?

Currency rates

1USD EQUALS 18.63 Mexican Peso

225000 Mexico Pesos equals USD 12,076.26

1 US Dollar equals16.06 Argentine Peso

57,000 Argentine Pesos equals USD 3,548.57

I will purchase the lumber in Argentina because its cost is the lowest as seen above.

2. Now, your logistics department (a little late) informs you of the following:

From where will you now Purchase the lumber?

Total costs

USA = $20,000

Mexico= $12,076.26+ (12,076.26*0.10)=$13,283.89

Argentina = $3,548.57+ (3,548.57*0.40)=$4,967.998

I would still purchase the lumber from Argentina because its cost is the lowest as seen above.

3. Finally, a little later (which it seems is always how it happens) but better late than never, your finance department tells you to expect an inflation rate of almost 30% in Argentina next year and 5% in Mexico.

Will this affect you decision, if so, how and why?

Now 1USD EQUALS 18.63 Mexican Peso

Next year1USD equals 1.05*18.63equal’s 19.57mexican peso

Amount of USD to pay next year is 225000/19.57 which is 11,497.189

Now 1 US Dollar equals16.06 Argentine Peso

Next year 1USD equals 16.06*1.30 equals 20.878 Argentine Peso

Amount of USD to pay next year is 57,000/20.878 which is 2,730.15Inflation in Mexico and Argentina will not affect my decision since it is country specific and therefore cannot affect the value of the dollar.

Based on the above scenarios, my assumption is that the value of the USD will not be affected by inflation of other countries. I will always prefer the USD because there is no inflation in the US which can affect its value. The sales terms that I recommend is the agreement to be made today, all documents signed and payments made because the currency future is uncertain.

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