1.Why is an exporter that is to be paid in six months in a foreign currency worried about fluctuating foreign exchange rates?
2.Are there ways in which this exporter can protect itself? If so, what are they?
3.How does the credit or money market hedge work?
4.Why is acceleration or delay of payments more useful to an IC than to smaller, separate companies?
5.How would you accomplish exposure netting with currencies to two countries that tend to go up and down together in value?
6.Why is the price adjustment device more useful to an IC than to smaller, separate companies?
7.Some argue that translation gains or losses are not important so long as they have not been realized and are only accounting entries. What is the other side of that argument?
8.Is the parallel loan a sort of swap? How does it work?
9.How and why would a seller make a sale to a buyer that has no money the seller can use?
10.Developed country partners in countertrade contracts have had problems with quality and timely delivery of goods from the developing country partners. How are they trying to deal with those problems?
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1. An exporter that is to be paid in six months in a foreign currency is worried about fluctuating foreign exchange rates because these rate fluctuations can impact the amount of home currency they will receive when they convert the foreign currency into their home currency. If the exchange rate decreases, the exporter will receive fewer units of their home currency, resulting in a lower amount of money than they initially anticipated. This can lead to financial losses for the exporter.
2. There are several ways in which an exporter can protect itself from the risk of fluctuating exchange rates. One approach is to enter into a forward contract, which allows the exporter to lock in a specific exchange rate for a future date. This provides certainty regarding the amount of home currency the exporter will receive. Another option is to use currency options, which give the exporter the right but not the obligation to exchange currencies at a predetermined rate. Additionally, the exporter can consider using currency futures or hedging through financial instruments to mitigate the impact of exchange rate fluctuations.
3. A credit or money market hedge involves utilizing financial instruments in the money or credit markets to offset the risk of exchange rate fluctuations. The exporter can borrow money in a foreign currency and simultaneously invest in its home currency. By doing this, the exporter aims to neutralize the potential effects of exchange rate fluctuations, as any gains or losses from changes in exchange rates are offset by the gains or losses from the investments.
4. Acceleration or delay of payments are more useful to an international company (IC) compared to smaller, separate companies because ICs often have multiple subsidiaries across different countries. By strategically accelerating or delaying payments between subsidiaries located in different countries, ICs can take advantage of favorable foreign exchange rates and optimize their cash flow. This ability to centralize and coordinate cash management is a competitive advantage that smaller, separate companies typically lack.
5. Exposure netting with currencies to two countries that tend to go up and down together in value can be accomplished by offsetting the currency exposures. This can be done by matching the receivables in one currency with payables in the other currency. By doing this, any gains or losses from exchange rate fluctuations between these two currencies will be netted out, reducing the overall exposure to currency risk.
6. The price adjustment device is more useful to an international company (IC) than to smaller, separate companies because ICs often have more significant bargaining power in negotiations with suppliers and customers. The price adjustment device allows ICs to negotiate contracts that include clauses for adjusting prices based on changes in exchange rates, inflation, or other factors. This flexibility protects ICs from potential losses caused by currency fluctuations and enables them to maintain profitability in international transactions.
7. The other side of the argument against disregarding translation gains or losses as merely accounting entries is that these gains or losses can have real economic effects when they are realized. Unrealized gains or losses can impact an organization's financial position, creditworthiness, and investment decisions. Additionally, if translation gains or losses are substantial and become a regular occurrence, they may indicate a need to review and adjust currency risk management strategies.
8. The parallel loan is a type of swap in which two parties exchange currencies with an agreement to reverse the exchange after a specified period at an agreed-upon exchange rate. In a parallel loan, a company borrows money in one currency and simultaneously lends the same amount in another currency to another party. This arrangement allows the company to match its liabilities and assets in different currencies, effectively hedging against exchange rate fluctuations.
9. There are situations where a seller may make a sale to a buyer that has no money the seller can use by utilizing alternative payment methods. For example, the seller may accept payment through trade credit, where the buyer agrees to pay at a later date or in installments. Alternatively, the seller may explore options like letter of credit, bank guarantees, or other forms of payment security provided by financial institutions. These methods provide assurance to the seller that they will eventually receive payment, even if the buyer does not have immediate cash.
10. Developed country partners in countertrade contracts are trying to deal with problems of quality and timely delivery from developing country partners through various strategies. These may include implementing strict quality control measures, establishing clear contractual terms, conducting thorough due diligence on the developing country partners, requiring performance bonds or guarantees, and engaging in ongoing monitoring and communication to ensure compliance with contractual obligations. Additionally, educating and training the developing country partners on quality standards and delivery expectations can also be part of the solution.