Analysis of Foreign Exchange Risk Exposure

Foreign Exchange Risk Management

a) What are the causes of UK and Brazilian markets' revenues in Dollars being lower than expected?

One of the main causes of the revenue in dollars generated from the markets in Brazil and UK being lower than anticipated by the company is due to the depreciation of the countries' currencies against the U.S. dollar. Between January and September, the GBP constantly depreciated against the USD, an aspect that had not been anticipated by the financial team of the company.

b) How is the company doing in these markets?

The company is not operating well in these two markets as the revenues generated in the market have incessantly decreased in the nine months period. As the currency continue to depreciate against the dollar so has the expected revenue depreciated over the period.

c) Based on the given data, should it continue or cease the operations in these two countries: UK and Brazilia?

Centered on the data provided in the tables, it can be considered that the company ought to cease its operations or employ different strategies of dealing with the foreign risk being experienced.

2. What should have the company done in order to avoid the current situation? Please be specific.

What the company should have done is to make use of hedging approaches and invoicing strategies to decrease the exchange rate exposure that was experienced by the company. According to Dohring (2008), by invoicing the domestic currency, the company would have the capacity to shift the transaction exchange rate risk experienced to the consumers who are abroad. Therefore, this implies that the company would have had a greater interest from the transactions for invoicing in its domestic currency. Also, this implies that in the nine-month period when the GBP was depreciating the company would be able to generate more revenue and incur less costs.

3. Compare the total revenues for the first nine months. How much did the company gain (loss) in these two markets as a result of not hedging the FX risk?

With regard to the data from the UK market, the company did not hedge against its funds and therefore made a loss. The company generated revenues of $41,245,000. However, if the company had hedged its funds, it would have generated a total revenue of $44,134,000. Therefore, the company made a loss of:

($44,134,000 - $41,245,000) = $2,889,000

The same case applies to the Brazilian market as the company did not hedge its funds, and as a result, made a loss. The company generated revenues of $61,064,000. However, if the company had hedged its funds, it would have generated a total revenue of $63,900,000. Therefore, the company made a loss of:

($63,900,000 - $61,064,000) = $2,836,000

4. a) Is the current contract with the supplier good for the company? What would be the situation if the exchange rate were not fixed?

Based on the data and information provided in the tables, the current contract with the supplier is not good for the company. This is because making comparison with the situation when the exchange rate is not fixed, the company would incur less costs due to the exchange rate fluctuating. This is because with the fixed rate, the company incurs a fixed rate of $18,000,000 in total, for the nine months. On the other hand, with the fluctuating exchange rate, the company incurs a total fixed rate of $17,094,000 in total. This implies that the situation would bring about a decreased cost of $906,000 if the exchange rate was not fixed.