Daisy Farm, a NSW based dairy company exports fresh milk to China. Chinese Yuan (CNY) has been
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Question:
Daisy Farm, a NSW based dairy company exports fresh milk to China. Chinese Yuan (CNY) has been trading at AUD/CNY5.00. Exports to China are currently 100,000 litres per year at the equivalent price of $0.50 per litre. There is a strong rumour that the CNY will be devalued to AUD/CNY$5.60 in the next month. Should the devaluation actually take place, the CNY is expected to remain unchanged for another 10 years. Accepting the rumour/forecast as given, the company faces a pricing decision which must be made before actual devaluation:
The company may either:
- maintain the same CNY price and in effect sell for fewer dollars, in which case the export volume will not change OR
- maintain the same dollar price, raise the CNY price in China to compensate for the devaluation and experience a 20% drop in volume. Direct costs in Australia are 60% of the Australian selling price.
- What would be the short-run (one-year) implication of each pricing strategy?
- Explain which strategy you would recommend to Daisy Farm.
- Discuss what other factors Daisy farm should take in to consideration. (Maximum 350 words)
Related Book For
Fundamentals of Multinational Finance
ISBN: 978-0205989751
5th edition
Authors: Michael H. Moffett, Arthur I. Stonehill, David K. Eiteman
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