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Financial Risk

Financial Risk. XYZ Corporation is Selling to ABC Corporation in Krakovia. Italian Machine Cost to make: Unknown Sale Price: €86,000 ($107,700) ($1.00 = €1.25) Price in Krakovia: KD 1,605,000. XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 = KD 10.00

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Financial Risk

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  1. Financial Risk XYZ Corporation is Selling to ABC Corporation in Krakovia Italian Machine Cost to make: Unknown Sale Price: €86,000 ($107,700) ($1.00 = €1.25) Price in Krakovia: KD 1,605,000 XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 = KD 10.00 Price Krakovia: KD 1,000,000

  2. Financial Risk XYZ Corporation Selling to ABC Corporation in Krakovia Because of uranium discovery, the KD now trades at $1.00 = KD 20.00 Italian Machine Cost to make: Unknown Sale Price: €86,000 ($107,700) (transaction remains the same) Price in Krakovia: KD 1,605,000 XYZ Machine Cost to make: $75,000 You Get: $50,000 Exchange Rate: $1.00 = KD 20.00 Price Krakovia: KD 1,000,000 If you sell your machines to Krakovia in KD, you will now lose $25,000 on each sale.

  3. Financial Risk XYZ Corporation Selling to ABC Corporation in Krakovia Second Scenario: Because of a faltering economy the Euro plunges in value Italian Machine Cost to make: Unknown Sale Price: €86,000 ($73,500) ($1.00 = €0.85) Price in Krakovia: KD 735,000 XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 = KD 10.00 Price Krakovia: KD 1,000,000

  4. Financial Risk XYZ Corporation Selling to ABC Corporation in Krakovia Second Scenario: Because of a faltering economy the Euro plunges in value Italian Machine Cost to make: Unknown Sale Price: €86,000 ($73,500) ($1.00 = €0.85) Price in Krakovia: KD 735,000 XYZ Machine Cost to make: $75,000 Sale Price: $100,000 Exchange Rate: $1.00 = KD 10.00 Price Krakovia: KD 1,000,000 The Italian Machine is now cheaper in KD, and even cheaper than the cost of your production.

  5. Financial Risk What are your choices?

  6. Financial Risk What are your choices? 1. Demand U.S. Dollars from your Krakovian Client.

  7. Financial Risk What are your choices? 1. Demand U.S. Dollars from your Krakovian Client. This would require the client to assume all currency fluctuation risk. The client must exchange money into U.S. dollars.

  8. Financial Risk XYZ Corporation Selling to ABC Corporation in Krakovia If Priced in U.S. Dollars Italian Machine Cost to make: Unknown Sale Price: €86,000 ($107,700) (transaction remains the same) Price in Krakovia: KD 1,605,000 XYZ Machine Cost to make: $75,000 You Get: $100,000 Exchange Rate: $1.00 = KD 20.00 Price Krakovia: KD 2,000,000 In KD, you are now far more expensive than the Italians, and you lose the sale.

  9. Financial Risk What are your choices? 1. Demand U.S. Dollars from your Krakovian Client. 2. Hedge your sale.

  10. Financial Risk Other Options?

  11. Financial Risk Other Options? Large companies balance currency in their own, internal treasury. Gains and losses on currency exchange are kept in separate accounts.

  12. Financial Risk Other Options? Large companies balance currency in their own, internal treasury. Gains and losses on currency exchange are kept in separate accounts. Off shoring. Move the production to areas in which the KD is not volatile against the local currency.

  13. Financial Risk Other Options? Large companies balance currency in their own, internal treasury. Gains and losses on currency exchange are kept in separate accounts. Off shoring. Move the production to areas in which the KD is not volatile against the local currency. Local Content. Source production in Krakovia.

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