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Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 = KD 10.00 Price Krakovia: KD 1,000,000 Italian Machine Cost to make: Unknown Sale Price: €86,000 ($107,700) ($1.00 = €1.25) Price in Krakovia: KD 1,605,000

Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

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Page 1: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

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

Page 2: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

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.

Page 3: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

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

Page 4: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

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.

Page 5: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

Financial Risk

What are your choices?

Page 6: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

Financial Risk

What are your choices?

1. Demand U.S. Dollars from your Krakovian Client.

Page 7: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

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.

Page 8: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

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.

Page 9: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

Financial Risk

What are your choices?

1. Demand U.S. Dollars from your Krakovian Client.

2. Hedge your sale.

Page 10: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

Financial Risk

Other Options?

Page 11: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

Financial Risk

Other Options?

Large companies balance currency in their own, internal treasury. Gains and losses on currency exchange are kept in separate accounts.

Page 12: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

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.

Page 13: Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 =

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.