Following the gains and dips in the currency market is a bit like trying to keep an eye on your best friend as they ride the Fahrenheit roller coaster in Hershey Park. Neither is very easy, you're always a few seconds behind, but watching it is a lot easier on the stomach than living it.A quick glance at the headlines from the past 24 hours indicates the international currency markets are alive, on the move, and dividing their constituents.
For months, China has been criticized and warned for a perceived significant undervaluing of their currency, and the matter may have come to a head:
Pressure Mounts on China as Yuan Hits New High
After unavailing efforts to pester China on their undervalued currency, today one country took matters into their own hands:
Soros Applauds Japan Intervention to Weaken Yen
Another country takes a different approach:
US Sets Steep Duties on China Seamless Steel Pipe
But China may refuse to be so easily bullied:
Trade War: China Fires First Shot, Hints It Might Dump US Bonds
Whether or not it all eventually gets sorted out peacefully, the markets have immediately responded:
Dollar Soars as Japan Acts to Curb Yen's Strength
And some are jealous at their lack of benefit:
EU: Yen Intervention More Effective If Coordinated
Obviously, reading just the headlines, although it tells an interesting story, over simplifies it a bit. Being able to accurately hedge on exchange rates is an art, a science, or a crapshoot, depending on who you ask. Either way, purchasing professionals will be forced onto the roller coaster ride, as their organizations continue to expand into global markets. The most informed will face the currency markets and choose a wise course of action as they attempt to maintain profit margins in exchange rate fluctuations.
Sample Test Question: Task 1-B-5
The most effective way to maintain the profit margin in exchange rates when making a purchase is to:
A) Negotiate the contract to purchase in the supplier's local currency
B) Negotiate the contract to purchase in the buyer's local currency
C) Hedge on the exchange rate
D) Hedge on the exchange rate or negotiate the contract to purchase in the buyer's local currency
3 comments:
The answer is D) Hedge on the exchange rate or negotiate the contract to purchase in the buyer's local currency.
This answer allows for fluctuation either way in exchange rates so should make sense as the single best answer.
Debbie,
Thank you for the answer. I agree with you.
I would appreciate, if you can throw some more light, in general, on the risks to buyer/ supplier for Options A), B) and C).
When contract is negotiated in the buyer's local currency, suppliers may not be willing to the deal (in a situation when supplier's local currency is presumed to be weakening). Perceived risk for supplier in that case is high.
Satyam
Satyam,
Certainly.
Answer A) - Negotiate the contract to purchase in the supplier's local currency - is not correct, becuase it is only an effective way to maintain a profit margin if you are assured the buyer's currency will remain strong compared to the supplier's currency.
Answer B) - Negotiate the contract to purchase in the buyer's local currency - could make purchases exchange rate neutral, depending on their accounting practices. It is not entirely correct because it only is successful in maintaining a profit margin with exchange rates if the buyer's currency remains weak compared to the supplier's currency, thereby netting a proft margin gain.
Answer C) -Hedge on the exchange rate - is partially correct and will provide a profit margin in exchange rates if the hedging turns out to be an accurate bet.
Answer D reflects the two most common actions to take when attempting to maintain a profit margin in exchange rates.
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