Your boss has asked you for input before your company makes a significant investment in developing overseas markets. Intense competition at home is making it harder and harder to make a profit, so trying to attract foreign business seems like a positive strategic decision. In doing some research, your boss thinks there may be difficulties to developing sales to another country.
The product you offer is energy related, and your company is larger than most. The country your boss has chosen is under a command economy.
1) What can you tell your boss about possible problems the company may face when they try to sell their energy product to the other country? What kinds of obstacles might you have to overcome? How might other government “interfere” with your possible sale of product?
Your boss thinks your answers may have some validity. He or she is concerned that currency fluctuations may damage the possibility of the company making a profit.
2) If your product sells for $10,000 per unit, and the ratio of currency is $1 = .8724 other currency, then how much other currency does the buyer need to buy 6 units of your product?
3) If the dollar is trading at $1=.8724 today and is forecast to trade at $1=.8726 in 80 days , is the other currency trading at a premium or a discount to the dollar?
4) If the buyer from the other country decides to buy 100 units, using a rate of $1=.8726, what is the value of the sale? If the profit margin is 25%, what is the gross profit from the sale of 100 units?
5) Your company decides to open a futures contract to avoid any risks. The premium for the contract is 2%. The currency rate today is $1=0.8724 of the other currency. If the other currency exchanges at a rate of $1 = 0.8927 in 90 days, is the other currency trading at a premium or a discount to the USDollar?
6) If the contract stated in question 5 is exercised (paid) at 90 days at $1=0.8927, then what is the gross profit your company will make on the sale of 100 units?