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The problem is that company may have customers oversease
The problem is that company may have customers oversease. This problem that face the company is the risk of the exchange rate Example :British exporter agree to sell commodity for $1.4 m , he will receive $1.4 m from an American client. If the exchange rate is $1.4/ £, then the invoice worth £1m. Suppose that the exchange rate can be one of the following 1.3 (pound is depreciated), 1.4, 1.5 how this affect the profit of the company
Expert Solution
Worth of invoice, when exchange rate is $1.4/GBP = 1400000/1.4 =£ 1,000,000Worth of invoice, when exchange rate is $1.3/GBP = 1400000/1.3 =£ 1,076,923Worth of invoice, when exchange rate is $1.5/GBP = 1400000/1.5 =£ 933,333If the exchange rate is $1.3/GBP, the profit will be higher by 1076923-1000000 =£ 76,923If the exchange rate is $1.5/GBP, the profit will be lower by 1000000-933333 =£ 66,667
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