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Financial RiskXYZ Corporation is Selling to ABC Corporation in Krakovia
XYZ MachineCost to make: $75,000Sale Price: $100,000
Exchange Rate: $1.00 = KD 10.00
Price Krakovia: KD 1,000,000
Italian MachineCost to make: UnknownSale Price: €86,000 ($107,700)($1.00 = €1.25)
Price in Krakovia: KD 1,605,000
Financial RiskXYZ Corporation Selling to ABC Corporation in Krakovia
XYZ MachineCost to make: $75,000
You Get: $50,000
Exchange Rate: $1.00 = KD 20.00
Price Krakovia: KD 1,000,000
Italian MachineCost to make: UnknownSale Price: €86,000 ($107,700)
(transaction remains the same)
Price in Krakovia: KD 1,605,000
Because of uranium discovery, the KD now trades at $1.00 = KD 20.00
If you sell your machines to Krakovia in KD, you will now lose $25,000 on each sale.
Financial RiskXYZ Corporation Selling to ABC Corporation in Krakovia
XYZ MachineCost to make: $75,000Sale Price: $100,000
Exchange Rate: $1.00 = KD 10.00
Price Krakovia: KD 1,000,000
Italian MachineCost to make: UnknownSale Price: €86,000 ($73,500)($1.00 = €0.85)
Price in Krakovia: KD 735,000
Second Scenario: Because of a faltering economy the Euro plunges in value
Financial RiskXYZ Corporation Selling to ABC Corporation in Krakovia
XYZ MachineCost to make: $75,000Sale Price: $100,000
Exchange Rate: $1.00 = KD 10.00
Price Krakovia: KD 1,000,000
Italian MachineCost to make: UnknownSale Price: €86,000 ($73,500)($1.00 = €0.85)
Price in Krakovia: KD 735,000
Second Scenario: Because of a faltering economy the Euro plunges in value
The Italian Machine is now cheaper in KD, and even cheaper than the cost of your production.
Financial Risk
What are your choices?
Financial Risk
What are your choices?
1. Demand U.S. Dollars from your Krakovian Client.
Financial Risk
What are your choices?
1. Demand U.S. Dollars from your Krakovian Client.
This would require the client to assume all currency fluctuation risk. The client must
exchange money into U.S. dollars.
Financial RiskXYZ Corporation Selling to ABC Corporation in Krakovia
XYZ MachineCost to make: $75,000
You Get: $100,000
Exchange Rate: $1.00 = KD 20.00
Price Krakovia: KD 2,000,000
Italian MachineCost to make: UnknownSale Price: €86,000 ($107,700)
(transaction remains the same)
Price in Krakovia: KD 1,605,000
If Priced in U.S. Dollars
In KD, you are now far more expensive than the Italians, and you lose the sale.
Financial Risk
What are your choices?
1. Demand U.S. Dollars from your Krakovian Client.
2. Hedge your sale.
Financial Risk
Other Options?
Financial Risk
Other Options?
Large companies balance currency in their own, internal treasury. Gains and losses on currency exchange are kept in separate accounts.
Financial Risk
Other Options?
Large companies balance currency in their own, internal treasury. Gains and losses on currency exchange are kept in separate accounts.
Off shoring. Move the production to areas in which the KD is not volatile against the local currency.
Financial Risk
Other Options?
Large companies balance currency in their own, internal treasury. Gains and losses on currency exchange are kept in separate accounts.
Off shoring. Move the production to areas in which the KD is not volatile against the local currency.
Local Content. Source production in Krakovia.
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