Your firm placed an order with a Chinese firm worth 10 million CNY, and delivera
ID: 431822 • Letter: Y
Question
Your firm placed an order with a Chinese firm worth 10 million CNY, and deliverable in 3 months. The agreement with the Chinese firm is that your firm has 3 months to pay after delivery. Keep in mind that your firm is based in the United States and obviously, your financial statements are stated in U.S. dollars. Your manager has asked you to prepare a recommendation on whether the cost of this transaction may be affected by foreign exchange risk and if so, how best to minimize this risk. In your report, you need to identify the spot exchange rate between the two currencies, find information on what direction the exchange rate might be headed in the future, i.e. is the value of the Chinese currency (CNY) expected to move relative to the US dollar over the next year, what is or are the reasons for this projection (so that management can discuss the risks further), and what strategies might be considered by management and what would you recommend. Because this is a financial transaction, make sure you provide the numbers. Your manager wants you to access a reliable site to find the current and forecasted exchange rates, as well as reliable sources to back up your report on how and why the exchange rate between both currencies might move.
Add sources with these.
Explanation / Answer
Yes the cost of the transaction may be accepted by foreign exchange rate. Recently the Chinese Yuan has dropped to the 13 month low. And it is speculated that it would drop further. The economic factor that are affecting Chinese Yuan are lower growth rate, lower interest rate and US-China trade war.
In order to protect against currency fluctuation, the company can enter into futures contract by locking the current price to be paid in future date. The company has to pay 10 million Chinese Yuan in 3 months. The current exchange rate is 6.8019. Through future contract the company can lock this exchange rate and pay 1470264 US dollars(=10000000/6.8019). The currency rate can fluctuate by new monetary and fiscal policies introduced by the Chinese government hence it is better to hedge the currency against foreign exposure.
In order to get updated of the current rate sites like fxstreet can be referred that provides with real-time currency data.
Sources
https://www.investing.com/news/forex-news/yuan-slips-further-imf-says-china-plays-by-the-rules-1543758
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