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Please correct me If I am wrong anywhere!
Sir, there is an example (in Kaplan text) which says:
[Question]
A US exporter sells one product in Europe on a cost plus basis.The selling price is based on a US price of $16 to cover costs & provide a profit margin.
The current exchange rate is €1.26 = $1
What would be the effect on the exporter’s business if the dollar strengthened to €1.31 = $1?
[Answer]
Kaplan has provided the answer for which I have no clue about what it is saying so I asked you instead.Since the seller invoice in Local Currency ($) so the seller is not affected by the changes in Foreign Exchange rate risk. We can see that Foreign Currency (€) has depreciated over the period which means that Foreign Customer is affected & he has to pay more €’s now.
BUT as you can see Foreign Currency has depreciated which means we have strengthened in our Local Currency ($) then why do we not get received more in $’s (since we sell goods to the customer)?
I thought foreign exchange has two-sided effect (one is on the customer & the other is on the seller)?
Confused here and Need your help! Thank you 🙂
Foreign exchange does not have a two-sided effect.
If I am in a Euro country and you are in a dollar country and I pay you in euros, then it is only you who has a foreign exchange problem because you have to convert the euros into dollars.
If I pay you in dollars the you do not have a foreign exchange problem because you are in a dollar country. I have the foreign exchange problem because I will have to buy dollars to be able to pay you in dollars.
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