Shelby Farris
Foreign Exchange
4-2
02/10/2024
Foreign Exchange Rate Memo:
On January 1, the daily spot rate is 3.13 MYR, and the forward rate is 0.317 U.S. dollars/MYR for
April 1st of the same year.
On April 1, the daily spot rate is 3.52 MYR.
*Scenario 1.
USD Total Revenue : 1.25 million MYR x 3.52 or 1,250,000 MYR x 3
=$4,400,000 USD
*In scenario 1, the total revenue in USD is $4,400,000. #1 is the most
profitable scenario, revenue is over 4 million USD, making the per unit price
to be $1,100 USD. The profit would be $1,010 USD per unit, over $4 million
USD. This scenario is most profitable BUT carries the highest exchange rate
risk.
*Scenario # 2, which is only $396,250 USD. However, scenario 1 is subject
to exchange rate risk, as the spot rate could change between time of sale
and time of conversion. With scenario 2, you do not have to worry about
exchange rate risk changing, as you already know your total revenue. In
scenario 2 the revenue per unit would be calculated by taking the total
revenue - $396,250 divided by 4,000 units. This results in it being $99.06
per unit USD. At $99.06 per unit, profit would be $9 per unit or $36,000 USD
total profit.
* For Scenario 3, if the cost of raw materials (MYR) is less than the cost of
materials (USD) (after conversion) it would be smart to buy raw materials in
that country- in that foreign currency, however- the value of MYR could
change, so it would be smart to calculate the cost of materials in both
currencies.
Foreign Exchange
4-2
02/10/2024
Foreign Exchange Rate Memo:
On January 1, the daily spot rate is 3.13 MYR, and the forward rate is 0.317 U.S. dollars/MYR for
April 1st of the same year.
On April 1, the daily spot rate is 3.52 MYR.
*Scenario 1.
USD Total Revenue : 1.25 million MYR x 3.52 or 1,250,000 MYR x 3
=$4,400,000 USD
*In scenario 1, the total revenue in USD is $4,400,000. #1 is the most
profitable scenario, revenue is over 4 million USD, making the per unit price
to be $1,100 USD. The profit would be $1,010 USD per unit, over $4 million
USD. This scenario is most profitable BUT carries the highest exchange rate
risk.
*Scenario # 2, which is only $396,250 USD. However, scenario 1 is subject
to exchange rate risk, as the spot rate could change between time of sale
and time of conversion. With scenario 2, you do not have to worry about
exchange rate risk changing, as you already know your total revenue. In
scenario 2 the revenue per unit would be calculated by taking the total
revenue - $396,250 divided by 4,000 units. This results in it being $99.06
per unit USD. At $99.06 per unit, profit would be $9 per unit or $36,000 USD
total profit.
* For Scenario 3, if the cost of raw materials (MYR) is less than the cost of
materials (USD) (after conversion) it would be smart to buy raw materials in
that country- in that foreign currency, however- the value of MYR could
change, so it would be smart to calculate the cost of materials in both
currencies.
