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Risk of Doing Business Abroad

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The Risk of doing Business Abroad

Risk of doing Business Abroad
How can a company eliminate the risk of foreign exchange rate while doing business overseas? Simple do not do business overseas. * Economic Exposure: When changes occur in rates, operating costs will make a product uncompetitive in the global market. Profits will be diminished. There is very little that a company can do about economic risk. * Translation Exposure: Currency exchange rates will reduce a company’s earnings and it will weaken the balance sheet. It can be argued that currency fluctuations have no significant impact on real assets. * Currency Exposure: this is caused by a negative move in a currency between the time when a contract is agreed and the time it is completed. ("Exchange rate risk," )
If the exchange rate of EUR/USD was 1.2868 in 30 days, what would be the impact on the company’s Profit and Loss at the time of the receipt of payment from the European customer? What would be the Economic exposure for the company? What would be the Translation Exposure if any? Include calculations.
The company is still making over the original $100,000.00 but the accounts receivable will need to be adjusted from the $138,680.00 to the current $128,680.00. Calculating the company’s receivables on a monthly basis will be a common event. This is done by taking the current exchange rate for the EUR/USD which is 1.2868 and multiplying that by the $100,000.00. This is an example of economic exposure due to the fact that 30 days ago the amount was $138,680.00 and now it is $128,680.00 this is a difference of $10,000.00. This is not a translation exposure; the company is not losing below the original $100,000.00.
What would be the impact on the firm if the exchange rate was EUR/USD 1.4868 in 30 days? Discuss in relation to the three currency exposures in 2. Include calculations.
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