Page 173 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes US Business Malaysian Business
Sales $1,900 M$200
Cost of goods sold 800 50
Gross Profit 1,100 150
Operating expenses 600 100
EBIT 500 50
Interest Expenses 200 70
EBT $ 300 M$ - 20

Source: International Financial Management, Madhu Vij, Excel Books.
Self Assessment

Fill in the blanks:

11. High Risk: High Reward strategy involves …………………… trading in the currency
market through continuous cancellations and re-bookings of forward contracts.
12. Successful pursuit of Low Risk: Reasonable Reward strategy requires quantification of
expectations about the future and the rewards would depend upon the ……………………
of the prediction.

13. …………………… involves automatic hedging of exposures in the forward market as
soon as they arise, irrespective of the attractiveness or otherwise of the forward rate.
14. Perhaps the worst strategy is to leave all exposures …………………….

15. The merits of Low Risk: Low Reward approach is that …………………… and costs of the
transaction are known and there is little risk of cash flow destabilisation.

10.4 Some Illustrations

1. Vogl Company is a U.S. firm conducting a financial plan for the next year. It has no foreign
subsidiaries, but more than half of its sales are from exports. Its foreign cash inflows to be
received from exporting and cash outflows to be paid for imported supplies over the next
year are disclosed below:

Currency Total Inflow Total Outflow
Canadian dollars (C$) C$35,000,000 C$2,500,000
German mark (DM) DM5,500,000 DM1,600,000
French franc (FF) FF15,000,000 FF12,000,000
Swiss franc (SF) SF 6,000,000 SF 8,000,000
The spot rates and one-year forward rates as of today are:

Currency Spot Rate One Year Forwad Rate
C$ $ .90 $.95
DM .62 .59
FF .16 .14
SF .65 .69
Based on the information provided, determine the net exposure of each foreign currency
in dollar.

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