-
- QUESTION
Review Group Problems G11‐1: Exchange Rate Effect on Industry and G11‐2: Exchange Rate Effects on Your Firm, located at the end of Chapter 11 in Managerial Economics: A Problem Solving Approach. Select one problem that relates to you and your current position in the work environment. Complete your response in 350-550words. Support your response with personal experiences or examples.
Alternate Scenario: If you are in an industry that does not deal with any foreign exchange transactions, use the petroleum industry for this assignment. Imagine that you work for a domestic oil refinery, and answer either question G11‐1 or G11‐2. You do not work for an oil producer, but rather for a refinery, which turns crude oil into many different petroleum products, from jet fuel to gasoline, which are then sold to world markets. You have the option of purchasing crude oil from U.S. sources or from various foreign countries. You must purchase crude oil in order to make products that you can sell in the United States or in other countries.
Prepare this assignment according to the guidelines found in the APA Style Guide, located in the Student Success Center. An abstract is not required.
| Subject | Business | Pages | 3 | Style | APA |
|---|
Answer
Alternative Scenario: Exchange Rate Effects on a Firm
Exchange rate plays a significant role for companies that focus on exporting goods and importing raw materials, as in the case of the domestic oil refinery firm within the U.S. The major factor that should be taken into consideration is the avoidance of currency risk. Currency risk refers to the threat of changes within the relative values of various currencies, which in turn can impact the business’s costs, profits, cash flow, and revenue. In relation to this, the domestic oil refinery firm should focus on sourcing crude oil from U.S. sources, as opposed to sources in other countries. Moreover, the company should accompany this step by selling the oil products that it produces within the U.S market, as opposed to selling them in other countries. Such an undertaking will enable the company to avoid currency risk. Focusing on domestic or U.S. sources will imply that all the firm’s revenues are earned in terms of U.S. dollars. In addition, all the company’s costs will be incurred in terms of U.S. dollars. As such, the volatility associated with global currencies will possess limited or no impact on the firm’s business activities within the U.S.
In a situation where the firm chooses to source crude oil from other countries, the currency risk could be experienced, especially when devaluation of currency occurs. For example, in a situation where the U.S. dollar experience a 10 percent drop in value against one of the country form where the firm sources crude oil, such a country could increase the price of crude oil by 10 percent, whereas the organizational or firm’s revenue remain constant. Therefore, in circumstances where the company has tight margins, this increase in the cost of crude oil could result in a difference between generating profits and making losses. The most probable experience that could befall the company in this situation is incurring losses. When the company elects to source crude oil from the U.S. and sell the oil products in other countries, the firm still subjects itself to currency risk. In such a scenario, all the firm’s costs of product or raw material sources and manufacture of oil products are incurred in the form of U.S dollars, but some of the company’s revenue is earned in the currency of the country to which oil products are sold. Therefore, in case the U.S. dollar strengthens against the currency of the country to which oil products are sold, the revenues earned by the firm from such a country will drop by the proportion of the increase in the strength of the dollar against the currency of that country. Since the firm’s costs will be constant, the company will incur losses from the sale of oil products. This situation could be more complicated if the company decides to source crude oil from various countries and export oil products to different nations.
Considering the analysis executed in the paragraphs above, it is vital to note that the best option for the domestic oil refinery firm is to source crude oil from the U.S. and sell all its oil products within the U.S. market. By embracing this approach, the firm will manage to safeguard itself from currency risk, which could come with immense losses.
References
|
Appendix
|
|