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Economic risk

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Economic risk

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • June 2, 2021 at 6:37 pm #622824
    AshleyMarc1997
    • Topics: 48
    • Replies: 24
    • ☆☆

    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 🙂

    June 3, 2021 at 6:54 am #622871
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49622
    • ☆☆☆☆☆

    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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