QUESTION:

• Discuss what you would need to consider when determining if the company should buy raw materials with the foreign currency in an effort to avoid foreign exchange risk and whether this is a viable option for the company.
• I Up vote

Scenario You manage the international business for a manufacturing company. You are responsible for the overall profitability of your business unit. Your company ships your products to Malaysia. The retail stores that buy your products there pay you in their local currency, the Malayslan ringgit (MYR). All sales for the first quarter are paid on April 1st and use the exchange rate at the close of business on April 1 st or the first business day after April 1 st if it falls on a Saturday or Sunday. The company has sales contracts with different vendors that determine the number of units sold well in advance. The company is contractually obligated to sell 4,000 units for exactly 1.25million MYR for the first quarter. The break- ven point for each unit is $90 in U.S. dollars. Use the following foreign exchange rates: - On January 1, the dally spot rate is 3.13 MYR, and the forward rate is 0.317 U.S. dollars/MYR for April 1 st of the same year. - On Aprit 1 , the dally spot rate is 3.52 MYR