Business Case Study Analysis Assignment Help- Case Analysis No. 6 (5 October 2017)

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Task:

 Business Case study Analysis

Questions

1. If you were an Australian exporter explain how a falling Australian dollar would affect

your firm’s sales revenues and profits.

 

2. What strategies should Australian importers adopt to manage the risk of a falling

Australian dollar?

 

3. For Multinational enterprises with assets in Australia and overseas, what strategies

would you recommend for maximising the value of your investments if the dollar

continues to fall?

Solution

Q1. If you were an Australian exporter explain how a falling Australian dollar would affect

your firm’s sales revenues and profits

A fall in the Australian Dollar against the US dollar will be an advantage to an Australian exporter. In this case, the international payments and trade are conducted in terms of the US dollar as the benchmark for all the transactions. An equivalent rate such as 1US dollar equal to 1 AUD would mean that the Australian exporters would get the actual amount of funds sold. However, a lower exchange rate for the AUD would mean that the Australian exporters earn more. For example, If a product was sold at US$1 it means that the Australian exporters would get A$1 at the exchange rate of 1. However, if the A$ depreciates to a rate of 141 to US$0.7, it would mean that the Australian exporter, selling the same product at the international market price of us$1, would earn a total of A$1.42. This is an increase in A$O.42 in overall earnings. Alternatively, if there is a high market competition, the exporters would sell their products at below a dollar and still earn A$1. This would ensure that the overall competitiveness of the Australian exports increases as the exporters would be able to offer quality products are relatively cheaper and lower prices as compared to the international competitors (Madura, 2016, p.83).

Q2. What strategies should Australian importers adopt to manage the risk of a falling

Australian dollar?

 

The Australian exporters have a variety of alternative strategies that they can employ to ensure that the risk of a falling dollar does not end up increasing the cost of importing products that would dent their profitability margins. One such a strategy is the use of an early paying strategy. In this case, for goods expected to be purchased in the foreseeable realistic future, they could be paid for at this time. This would imply that at the time the AUD fall, the importers will not have to incur the extra expenses to purchase the goods (Madura, 2016, p.103). Secondly, they could buy a forward contract. In this case, they could agree to purchase the goods at a specific exchange rate despite the prevailing market rates at the time. This approach is strategic in markets with unpredictable and fluctuating exchange rates. Thirdly, the entities would purchase the USD at its current rate and have a reserve of the foreign currency. This would ensure that at the time of purchasing they use the USD currency implying there will be no additional costs (Madura, 2016, p.106). Lastly, the most undesired approach would be relocating from Australia.

 

Q3. For Multinational enterprises with assets in Australia and overseas, what strategies

would you recommend for maximising the value of your investments if the dollar

continues to fall?

 

The main strategic approach through which entities would safeguard the value of their assets in the Australian market would be through hedging. In this case, the hedging process would ensure that the entities invest in capital ventures that seek to offset the potential losses incurred. A hedging process ensures that in the event of a loss arising from a currency fall, the investment portfolio covers for the loss. However, there are no gains if the currency does not fall as anticipated (Madura, 2016, p.187). Alternatively, the entities would invest in buying undervalued currencies and those with high-interest rates to offset the fall in the AUD.


Reference

Madura, J. 2016, International financial management. US: Cengage Learning Custom Publication

 

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