You are on page 1of 10

MULTICURRENCY DECISION

A BUSINESS REPORT

NAME: ABIGAIL COLACO STUDENT ID NO: 500296068

MODULE: ASB 4801 RESEARCH METHODS


MODULE CO-ORDINATOR: KOSTAS NIKOLOPOULOS

D A T E : 1 4 T H D E0C E M B E R , 2 0 1 1 WORD COUNT: 1700

CONTENTS
NO. 1 2 Synopsis
2

TOPIC

PAGE NO.

Introduction 2.1.Aims 2.2.Methodology 2.3.Analysis 2.4.Limitations


3-6

3 4 5 6

Conclusion Recommendations Appendices References

7 7 8-9 9

LIST OF CHARTS Chart No.


2.3.1 2.3.2

Title
Revenue expected on sales after converting the currency Estimation of profit on accepting Banks offer

Page No.
4 5

1. SYNOPSIS
This Report was requested by the Sales Manager of the Company in order to arrive at a decision of converting their local currency i.e. Dollars into their customers home currency at the time of delivering their precision grinding machines. The main findings were that, the company is likely to earn profit on sale, in between $2,150,000 and $2,250,000, without having accepted the Bank offer which assured a sum of $2,150,000. If the Bank offer is accepted the company will be risk free and earn definite sum of profit on sales made. The Banks profit on offering the proposal would be around $25,400. Acceptance of the bank offer would make the sales manager comparatively more risk averse than the company CEO. It was also found that the bank would be able to reap profits, if it had to utilise or convert the currencies into a needed currency instead of converting all the currencies obtained into US Dollars. It was concluded that, the manager should take the risk of converting the currency himself, rather than accepting the Banks offer and secure benefits of the same. The Recommendations are that the Sales manager should be very vigilant and must note the fluctuations taking place in the FOREX market and convert the currency at the right time, as an increase or decrease in the value of its customers home currency can have an impact on the sales of the company and the same advice can be implied by the Bank if its proposal is accepted.

2. INTRODUCTION
The company sells its precision grinding machines to its customers based in four different countries, each of the customers dealing in their respective home currencies. Therefore the company had planned to convert its home currency i.e. Dollars ($) into the currencies in which its customers were dealing i.e. Pounds (), Yen (), Euro () and South African Rand (R) at the exchange rate prevalent at the time of delivering their machines. The aims, methodology, analysis and limitations of this report are discussed in detail below. 2.1 Aims: To find the distribution of the uncertain revenue from the contract in U.S Dollars. To ascertain the probability of the Revenue being below $2,150,000 and above $2,250,000 on converting the currency. To find out whether it is beneficial if the manager, accepts an offer from the International Bank which assures fixed sum of $2,150,000. To find out who is more Risk Averse, between the Company CEO and the Sales Manager if the Bank offer is accepted. To assume the Banks risk and profit margin, if the company accepts the Banks Offer. To find out whether the Banks risk will increase or decrease if it plans not to convert the currencies into U.S Dollars but instead, spends or saves the same as local currency or converts them into some other needed currency. 2.2 Methodology: Primary data and Secondary data was gleaned through Sales Estimates Report of the Company regarding the selling price, exchange rates of the four different countries and their standard deviation expected at the time of delivery. Bank offer details. Books based on Normal distribution. Statistical tools and templates.

2.3 Analysis: During the study it was found that, the company has a probability of earning revenue of about $2,175,000 on its sales made, by converting its local currency at the foreign exchange rate prevalent in the market. An analysis was made in order to find out what would the possibilities of earning a revenue be, if it was to exceed $2,250,000 and the possibilities of it being lower than $2,150,000. A study was also conducted in order to find out the revenue expectations if the Sales manager had to accept the offer made by the International Bank which assured a fixed amount of $2,150,000 to the company, by bearing the risk involved solely. It also involves estimating the value of risk the Bank is offered to on making the offer, its expected profit and chances of incurring losses. This report is prepared by assuming that the exchange rates are normally distributed and independent. The main findings are as follows:

2.3.1 Revenue expected on sales after converting the currency


5%

29% p(y> $ 2250000) p(y<$ 2150000)

The above diagram shows that, there are 5% chances that the company could make a profit above $2,250,000 on proceeding with the multicurrency decision, However there is more possibility of the profit being around about or less than $2,150,000, i.e. 29%. Whatever the final income would be earned, the company is assured to make a profit on converting its currency on said terms.

2.3.2 estimation of profit on accepting the Bank's offer


29%

71%

Bank offer

Sales Manager

The above diagram makes it crystal clear, that there is higher possibility of reaping profits by handling the entire plan by the manager himself, other than accepting the banks offer which makes up only to 29% of the profit. There is a probability of making a profit of 71% if the manager is ready to take risk. The Bank offer if considered to be accepted will ensure that the company receives the exact amount as decided i.e. $2,150,000. It will not only help the revenue earned be certain, but will also make the company sales revenue risk free. Acceptance of the Bank offer would make the sales manager more risk averse then the company CEO, as he is the one who is directly opposing the risk. The International Bank offering the proposal is also likely to make a profit in this transaction; however it has to face risk too while converting all the currencies into US Dollars at the exchange rates prevalent. Exchange rates are very volatile, thereby making it difficult to arrive at the exact amount of profit and risk involved. There is a likelihood of the bank facing losses of around 29% below $2,150,000 if the currencies arent traded at a proper time and at a competitive rate. If the Bank is able to convert the currencies at the right time, it can expect a profit of $25,400. However the Banks value of risk is estimated to be approximately around $50,000. If the Bank does not plan on converting all the currencies into US dollars, but instead plans to spend them in the international financial markets or store the same as local currency or converts them into a much needed currency it can make a substantial profit by bearing a certain amount of risk. There are pros and cons of taking the multicurrency decision as a lot of risk is involved. There are possibilities that the company may
5

incur more losses if the decision is not taken correctively by the manager himself. Utmost care should be taken while taking the multicurrency decision. 2.4 Limitations: There were few difficulties I came across while completing the report. Exchange rates are highly fluctuating thus they are unpredictable; it can affect our future revenue. The currencies of the four countries differ and there is a lot of volatility in the FOREX market. An increase or a decrease in the currency of a particular country can affect the exports/sales of the company. Here the exact amount cannot be determined. Estimating the exact amount of profit to be earned in future. The time limit was too short to go into intricate details.

3. Conclusions
It can be noted from the above information and facts that there is a higher probability of the Company of earning profit on its sales on its own, other than accepting the Banks offer. The bank offer ensures an assured amount of profit; however there are chances of the revenue exceeding the assured sum in the near future if the sales manager is willing to take the risk. But if in case the Bank offer is accepted it can be beneficial to both the parties i.e. the sales manager and the Bank, as the manager gets assured some of profit plus freedom from bearing any risk and the Bank can make a substantial profit on the proposal by converting the currency for later use. The Bank may be dealing in various currencies and thus, it may want to utilise the same for various other reasons. It may want to convert the obtained currency into some other needed currency or spend it; however it should be carefully done by estimating the value of risk and anticipating the future profit on currency transactions. Here the currency exchange rate plays a very vital role, as an increase or decrease in a particular currency can also have an impact on banking transactions. The Bank is likely to lose its money if the return is less than what it was expected to be if decision of converting the currency is not taken carefully, but the company can definitely get its assured money.

4. Recommendations
I would recommend that the sales manager should reject the Banks offer and work on his own, as there more chances of earning higher profits when compared to the assured return. However the manager can seek advice regarding currency transactions with a financial intermediary, in order to estimate future profits and degree of risk involved in implementing a multicurrency decision. The sales manager needs to be vigilant and should take the right step at the right time in order to make optimum use of the opportunity. My recommendation for the Bank would be to convert the currencies partly, other than converting all the currencies at one go. It should consider the option of converting the obtained currencies into a much needed currency, or else spend it in any foreign exchange transaction, or save them as local currency after considering the profit and risk margin, as there is a higher proportion of risk involved in currency transactions.
7

5. APPENDICES
Batch a. Customer 1 2 3 4 quantity 12 8 5 2 Selling price 57810 8640540 97800 4015000 Mean 1.41 0.00904 0.824 0.0211 Variance 0.001681 0.0002025 0.00116964 0.0006889 Standard Deviation

2175398.0528

2100663072

45832.991

b.
Mean 2175398 Stdev 45832.99

P(X<x) 0.2897

x 2150000

x 2250000

P(X>x) 0.0518

x1 99 90

P(x1<X<x 2) 0.0000 0.0000

x2 103 95

P(<x) 0.9 0.95 0.99

x 2234135. 39 2250786. 61 2282021. 53

x 2116660.71 2100009.49 2068774.57

P(>x) 0.9 0.95 0.99

Symmetric Intervals P(x1<X<x x1 x2 2) 2057340 2085567 2100009 0.99 0.95 0.9 2293456 2265229. 1 2250786. 6

c. P (Bank will incur Loss) =p (the previous loss) =p(y<$2,150,000) =0.028974 d. Banks expected profit=2175398.0528-2,150,000= $25,398.052 e. Banks value at risk=2,150,000-2,100,009 = $49,991

6. REFERENCES
1. Complete Business Statistics -6th edition, by Amir Aczel & Jayalal sounderpandian. 2. Statistics Tutorial-Normal Distribution. www.stattrek.com. 3. Normal Distribution-Wikipedia Encyclopedia. 4. The Normal Distribution. www.netmba.com.

You might also like