Foreign Currency Risk

FOREIGN CURRENCY RISK Q1. Jack is a UK based car exporter who exports luxury cars and has a competitor in Germany; he has recently seen a change in foreign currency that pound ( £) of UK has strengthened against euro (â‚ ¬) of Germany. What is the type of risk does Jack face in his business? (MCQ)Credit RiskTranslation Risk Economic Risk Transaction Risk(2 marks) Q2. Yarn Co is multinational business & wants its foreign subsidiary financial statements. They are making exchange losses when the accounting results of its foreign subsidiary are translated into the home currency. Which type of currency risk does Yarn Co face? (MCQ)Netting off RiskTranslation Risk Economic Risk Hedging Risk(2 marks) Q3. Saito Co, a USA based fish exporter has competition with Sakkara Co based in Bangladesh. He believes he faces an economic risk in the business. What type of impact does it have on Saito Co? (MCQ)Direct ImpactIndirect ImpactPolitical ImpactEconomic Impact(2 marks) Q4. The current spot rate of UK ( £) to USA ($) is  £3:$1.5. The interest rates per annum are UK 5% & USA 9%. What will be the two-month forward rate (to the nearest two decimal places)? (FIB)4013204318000 £ :$1(2 marks) Q5. The current spot rate of UK ( £) is  £3. The inflation rate per annum of UK is 3% & the expected future six-month spot rate is  £3.06. Calculate the foreign annual inflation rate? (FIB)501656223000%(2 marks) Q6. Which of the following statements relates to International Fisher Effect? (MCQ)The exchange rates of countries depending on inflation ratesThe exchange rates of countries depending on interest ratesPrices are same to different customers in an economyNominal interest rate differentials between countries provide an unbiased predictor of future changes in spot exchange rates.(2 marks) Q7. Which of the following differences will result in an Expectation Theory? (MRQ)The difference in Inflation RatesDifference between Spot & Forward RatesThe difference of Interest RatesDifference between Spot & Future Rates(2 marks) Q8. Select the appropriate theory with the following statements. (P&D)Depreciation of forwarding rates will be due to high-interest rates Differences in nominal rates due inflation rates A commodity is priced same in every country The forward rate is a fair predictor of the spot rate in the future EXPECTATION THEORY PURCHASING POWER PARITY THEORY INTERNATIONAL FISHER EFFECT INTEREST RATE PARITY THEORY(2 marks) Q9. Patio Co. operates in the USA. They will be receiving a payment of  £2,500 from customers in four months' time. Calculate Patio Co.'s receipts in four months' time? Use the following rates. (MCQ)Spot Rate  £1.4/$ –  £1.6/$4 Month Forward Rate  £1.8/$ –  £2.0/$$1,786$1,563$1,389$1,250(2 marks) Q10. Fray Co is a USA based company ; imports Robots from China. The usual credit period is three months. Fray Co has to pay  ¥60,000. Calculate the loss/gain of the payment on forwarding contract? (MCQ)Spot Rate  ¥1.321/$ –  ¥1.521/$3 Month Forward Rate  ¥1.654/$ –  ¥1.854/$$7,085 (Loss)$9,144 (Loss)$9,144 (Gain)$7,085 (Gain)(2 marks) Q11. PXG Co, a UK based company has made $3,600 sale to its USA customer on credit. The current  £/$ exchange rate is  £6.4/$12.8. It is expected that UK  £ will strengthen by 15%, by the time USA customer pays. Calculate the receipts in  £? (MCQ) £244.57 £281.25 £489.13 £562.5(2 marks) Q12. The dollar is quoted at a $0.067 premium for the forward rate. The current exchange rate is $/ ¥ 1.0005 +/- 0.0045. What will a $4,900 payment convert at forwarding rate? (MCQ) ¥4,876 ¥4,920 ¥5,224 ¥5,274(2 marks) Q13. A UK based company Bib Co will receive a foreign payment of $2,000 in four months' time. The spot rate is $1.1/ £ – $1.4/ £. Calculate the income in four months' time using money market hedging? (MCQ) Borrow DepositDollar ($) 4% 5%Pounds ( £) 3% 2% £1,414.4 £1,419.4 £1,800 £1,807(2 marks) This information is used for Q14, Q15 ; Q16.A USA based company has to make a payment of  £95,000 in nine months' time. The spot rate is  £2.2/$ –  £2.5/$. Following details are:Borrow DepositDollar ($) 7% 5%Pounds ( £) 5% 3% Q14. Calculate the foreign payment using money market hedging? (MCQ) $37,164$42,232$43,816$44,449(2 marks) Q15. Calculate the foreign payment if the nine-month forward rate is  £2.37/$ –  £2.71/$? (FIB)3511551206500$ (2 marks) Q16. Calculate the gain/loss for the company for not leading the payment? (MCQ)$4,365 (Gain)$4,365 (Loss)$3,816 (Loss)$3,816 (Gain)(2 marks) Q17. Following statements relate to Forwarding contracts. (HA)An immediate binding contract TRUE FALSEThe forward rate is variable in nature TRUE FALSEThe timing of the contract is unknown TRUE FALSE(2 marks) Q18. A company wants to reduce its transaction risks when conducting business with foreign receivables/payables. Following statements are said by the directors during this years' AGM. Select the appropriate statements to reduce the risk. (MRQ) â€Å"The company should hold back its payments for few months†, this technique is Leading†The company should continue as normal†Ã¢â‚¬ I have some friends offshore who work in a bank, I may able to arrange a foreign account for the company† said by a director†The company should deal in the foreign currency only† (2 marks) Q19. Juab Co is a manufacturing company ; has a foreign supplier who supplies raw materials. Recently the supplier has now become a customer as well, who purchases Juab Co.'s finished products and sells in his respective country. Which technique of reducing risk is applicable for Juab Co? (MCQ) Money market contractLeading & LaggingForward market hedgingMatching & Netting(2 marks) Q20. Which of the following statements are true in relation to futures? (MRQ)Currency futures are standard contractsA high premium is paid initiallyFutures are available in all currencies offered by the bankFuture contracts are binding (2 marks) Q21. A company wants to hedge itself from any currency risk. They have decided to hedge themselves using currency futures. They have to make a payment in May of $36,000. The futures have a contract size of $15,000. Which of the following futures will they select? (MCQ)Buy three futures on MarchSell two futures of MarchBuy two futures of JuneBuy three futures of September(2 marks) Q22. Select the appropriate option in relation to futures. (HA) Transaction cost is lowest ADVANTAGE DISADVANTAGEContracts are limited to some currencies ADVANTAGE DISADVANTAGEThe exact date does not have to be known ADVANTAGE DISADVANTAGE(2 marks) Q23. Picots Co is UK based company which has a lot of foreign customers. It will be receiving a payment from USA based customer of $500,000 in five months. The company has been advised to use derivatives to hedge themselves against any currency risk. If they opt for currency options which of the following are correct? (MCQ)Buying a USA $ call option in the UKBuying a USA $ put option in the UKBuying a UK  £ call option in the USABuying a UK  £ put option in the USA (2 marks) Q24. Which of the following statements relate to currency options? (MRQ)In future the market becomes favorable and the company will face a loss because it is bound to the contractThey are negotiated Cannot be traded in all currenciesEasily arranged & Flexible (2 marks) Q25. Which of the following is incorrect for swaps? (MCQ)It is negotiated between two parties having their own spot rateIt has a nominal costIt is an over the counter dealIt has multiple markets (2 marks) Q26. Which of the following has a refundable cost? (MCQ)Currency FuturesForward ContractsCurrency OptionsCurrency Swaps(2 marks) FOREIGN CURRENCY RISK (ANSWERS) Q1. CEconomic risk is the variation in the value of the business due to unexpected changes in exchange rates. This is an indirect impact on Jacks business. Q2. BThey are making exchange losses when the accounting results of its foreign subsidiary are translated into the home currency. This is an indication of Translation Risk. Q3. AIt is a direct impact on Saito Co as the USA being home currency strengthens then foreign competitors Sakkara Co in Bangladesh is able to gain sales at your expense because your fish have become more expensive in the eyes of customers both abroad and at home. Q4.  £3.02Interest rate parity theory = 3 Ãâ€" 1+(9% Ãâ€" 212)1+(5% Ãâ€"212) =  £3.02 Q5. 7%Purchasing power parity theory = 3 Ãâ€" 1+(x% Ãâ€" 612)1+(3% Ãâ€"612) =  £3.06X% = 7% Q6. DThe exchange rates of countries depending on inflation rates (Purchasing Power Parity Theory)The exchange rates of countries depending on interest rates (Interest Rate Parity Theory)Prices are same to different customers in an economy. The law of one price. (Purchasing Power Parity Theory)Nominal interest rate differentials between countries provide an unbiased predictor of future changes in spot exchange rates. (International Fisher Effect) Q7. When these two will become equal, Expectation Theory arises. Difference between Spot & Forward RatesDifference between Spot & Future Rates Q8.Depreciation of forwarding rates will be due to high-interest rates INTEREST RATE PARITY THEORYDifferences in nominal rates due to inflation rates INTERNATIONAL FISHER EFFECTA commodity is priced same in every country PURCHASING POWER PARITY THEORYThe forward rate is a fair predictor of the spot rate in the future EXPECTATION THEORY Q9. DReceipts =  £2,500 à · 2.0 = $1,250Q10.Payment (Forward) =  ¥60,000 à · 1.654 = $36,276Payment (Spot) =  ¥60,000 à · 1.321 = $45,420Gain = $9,144Q11. AFuture Rate = $12.8 Ãâ€" 115% = $14.72Receipts =  £3,600 à · 14.72 = $244.57 Q12. DThe Spot rate = $0.996/ ¥ – $1.005/ ¥ -/+ 0.0045The dollar is at a premium so subtract it as if dollar strengthens then yen will weaken in the forwards market. The new Spot rate = $0.929/ ¥ – $0.938/ ¥ – 0.067Payment = $4,900 à · 0.929 =  ¥5,274 Q13. BBorrow Foreign Currency = $2,000 à · [1 + (4% Ãâ€" 4/12)] = $1,974Convert Foreign to Local = $1,974 à · 1.4 =  £1,410Deposit (Interest) = (1,410 Ãâ€" 2% Ãâ€" 4/12) =  £9.4Total Receipts =  £1,410 +  £9.4 =  £1,419.4 Q14. DDeposit Foreign Currency =  £95,000 à · [1 + (3% Ãâ€" 9/12)] =  £92,910Convert Foreign to Local =  £92,910 à · 2.2 = $42,232Deposit (Interest) = ($42,232 Ãâ€" 7% Ãâ€" 9/12) = $2,217Total Payments = $42,232 + $2,217 = $44,449 Q15. $40,084Payments =  £95,000 à · 2.37 = $40,084Q16. BQ17. An immediate binding contract TRUE The forward rate is variable in nature FALSEThe timing of the contract is unknown FALSE Q18.†The company should hold back its payments for few months†, this technique is Lagging (Incorrect)†The company should continue as normal† This refers the company should take no action (Correct)†I have some friends offshore who work in a bank, I may able to arrange a foreign account for the company† said by a director. This statement indicates opening a foreign bank account. (Correct)†The company should deal in the foreign currency only† The company could deal in home currency rather in foreign currency (Incorrect) Q19. DThis technique attempts to match the same foreign currency receipt & payments due at the same time. The netting of the intra debit & credit balances saving transaction cost & reducing risk. Q20.Currency futures are standard contracts, fixed limits specified (True)A high premium is paid initially, this is applicable in options (False)Futures are available in all currencies offered by the bank, Only in few currencies (False)Future contracts are binding, they have to be closed (True) Q21. CThe Futures can be bought or sold only four times a year which are March, June, September & December. Future contracts can be signed relating to a month after the date of receipt. They will buy two futures each of $15,000 and the remaining $6,000 can be hedged using other techniques. (E.g. forward contracts) Q22. Transaction cost is lowest ADVANTAGE Contracts are limited to some currencies DISADVANTAGEThe exact date does not have to be known ADVANTAGE Q23. BPicots Co will want to sell the USA $ when they receive the payment which is why they will use USA $ put (sell) option bought in the UK. Q24. In future the market becomes favorable and the company will face a loss because it is bound to the contract, this statement relates to future contracts They are negotiated, this statement relates to options (Correct) Cannot be traded in all currencies, it is a disadvantage hence this statement relates to options (Correct)Easily arranged & Flexible, this statement relates to swaps Q25. DIt has no markets; it is a tailor-made an agreement between two parties.Q26. ACurrency Futures, An initial margin cost which is refundableForward Contracts, has a transaction costCurrency Options, A non-refundable premium costCurrency Swaps, No initial cost

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Marketing assignment Essay 1.1 Ryanair are pioneers of low cost airlines in Europe operating more than 1600 daily flights from 57 bases across 1600 low far routes connecting 180 destinations in 29 countries. They recently announced that they have ordered 175 new Boeing craft. 1.2 In order for Ryanair to keep the costs to a minimum, their airline uses small, regional airports only to reduce operational costs and operates as a point-t-point airline carrier, thus when other airlines avoiding the cost associated with a hub-and-spoke service. 1.3 Ryanair advertises it’s self as a â€Å"The low fare airline† and has a price promise under which it will pay double the difference if a customer finds the same flight cheaper elsewhere. 1.4 They pay as little as possible for their aircraft. They get big discounts on aircraft because they buy them when other airlines want them. 1.5 They spend as little as possible on advertising. They do not employ advertising agencies; instead all of their advertising is done in-house. 1.6 They don’t use travel agencies, so they don’t pay commissions. Ryanair uses direct marketing to recruit and retain customers and to extend products and services to them and this reduce cost. You book online or on the internet. This saves 15% on agency fees. Question 2 Kulula and Mango are South Africa’s low cost airlines. These airlines have in some areas imitated the Ryanair business model. 2.1 Kulula uses Lanseria Airport as an alternative to OR Tambo airport which can be attributed to reduction operational costs. Ryanair makes use of smaller airports instead of the large busy airports to reduce costs and reduce the time between flights. 2.2 The low cost airlines in South Africa, such as Kulula and Mango also upsell products such as car hires, travel packs and hotel accommodation. This is similar to the business model of Ryanair. 2.3 The low cost airlines in South Africa also reduce their costs by not including food on the fare; you can buy your food if you want. 2.4 To make bookings simpler the customers of Kulula and Mango can also book and buy flight tickets at Shoprite/Checkers for there’s is no commission paid to travel agencies. The internet online process also exists for self-service of making bookings. Question 3 The marketing environment consists of Micro and Macro environment. According to Kotler and Armstrong (2012;90) Micro environment consists of the actors close to the company that affect its ability to serve its customers such as the company its self, its suppliers, its marketing partners, customers and the general public. The macro environment is said to consist of the larger societal forces that affect the macro environment such as political, economic, social, technological, natural environment, and legal framework (Kotler Armstrong, 2012) 3.1 The Micro environment 3.1.1 Company Ryanair’s mission is to keep their customers happy by offering a simple service and that involves maintaining low-cost fares, such as offering no meal options or extended service elements such as beverage consumption, thus keeping labour-related costs low and inviting the more humble or thrifty consumer to enjoy travel to regional destinations without the worry of excessive airline expense. 3.1.2 Suppliers Suppliers are very important to the company and they are the determining factor for Ryanair to keep customer value. In a running an airline Ryanair require a lot of fuel but they are unable to influence their suppliers since the price of fuel is controlled by external bodies such as OPEC(Ryanair Annual Report, 2004). 3.1.3 Competitors The increasing number of competition with carriers offering lower-cost fares is impacting the consumer mentality regarding which carrier to choose when travelling within European destinations. 3.1.4 Marketing Partners Ryanair does not use advertising agencies instead all their advertising is done in-house by doing so they are cutting cost and making sure that they maintain low cost strategy. They simple use adverts that tell passengers that Ryanair has low fares. 3.2 Macro environment 3.2.1 Political The external political environment is one of significant advantage to Ryanair, as the majority of its operations are contained within Europe. It is relatively common knowledge that this region maintains political stability, thus Ryanair does not experience issues with governmental instability in Europe as a concern regarding passenger volumes or flight destinations. 3.2.2 Technological The technological environment does not appear to significantly impact the firm in a negative capacity as the firm. Additionally, supply chain software programs and other integrated software applications are available to assist Ryanair in streamlining labour functions and improve internal organisational efficiency. 3.2.3 Economical Economical factors in the Euro region such as the Greece debt issues, increased unemployment in Spain and other countries have a negative impact in the number of customers for air travel like Ryanair. Question 4 Low cost airline offer a no-frill service, they sell the cheapest tickets you can buy. Unlike branded airlines that argue that passengers are willing to more for a better level of service. These are the reason I would not use low cost airlines such as Ryanair. 4.1 Customer Service Ryanair offers poor customer service such as when your bag is broken into no compensation is provided. It is also reported that their staff is unfriendly and rude. Ryanair also do not make provisions for fragile items that you wish to carry on the aircraft with you. Musical instruments and sporting equipment can be taken but at a fee. 4.2 Value added services There is no complementary food and what is offered is expensive and unhealthy. 4.3 Misleading pricing The policy of 70% sets sold at lowest fares and 30% at higher fares can be misleading. This means that you may not always be paying the lowest price for the fares. 4.4 Convenience Ryanair does not offer convenience as you cannot chose seat. You also cannot change flights. Their plains are old and offer low comfort. They use secondary airports which tend to be smaller regional airports. Question 5 Ryanair’s objective is to firmly establish itself as Europe’s leading low-fares scheduled passenger airline through continued improvements and expanded offerings of its low-fares service. Ryanair aims to offer low fares that generate increased passenger traffic while maintaining a continuous focus on cost-containment and operating efficiencies 5.2 Understanding customer needs and wants 5.2 Design a customer driven marketing strategy 5.3 Construct an integrated marketing program that delivers superior value 5.4 Build profitable relationships and create customer delight Question 6 6.1 Product or Service Low cost, no frills air travel to Europian destinations. There is no free food or drink on-board. Food and drink are income streams. You buy on-board, or you do take your own food and drink if you like. 6.2 Price Ryanair has low fares. 70% of seats are sold at the lowest two fares. 24% of seats are charged at higher fares. The last 6% are sold at the highest fare. 6.3 Place Ryanair does not use travel agents so it does not pay agency commissions. It uses direct marketing techniques to recruit and retain customers, and to extend products and services to them (i.e. Customer Relationship Management). This reduces costs. You book online over the Internet. This saves them 15% on agency fees. They are based in Stansted in Essex which is known as a secondary airport. It is new and accessible. It is cheaper to fly from Stansted than either Heathrow or Gatwick, and since it is less busy Ryanair can turn aircraft around more quickly. 6.4 Promotion They spend as little as possible on advertising They do not employ an advertising agency. Instead all of the advertising is done in-house. In fact OLeary himself oversees much of the promotion of Ryanair. They use simple adverts that tell passengers that Ryanair has low fares. Ryanair employs controversy to promote its business. For example in 2009, the company reasoned that passengers would be charged  £1 to use the toilets on board. OLeary reasoned that passengers could use the terminals at either the destination or arrival airport. This would speed things up. It was reasoned that this is what passengers wanted since they did not want other passengers leaving their seats and walking the aisles to go to the toilet. OLeary also argued that larger passengers should be charged more since they took up more room again it was reasoned that this is what the majority of passengers wanted. 6.5 People Pilots are recruited when they are young as pilot cadets. They work hard and take early promotions and then move on after 10-years or so to further their careers. Cabin crew pay for their uniforms to be cleaned. They invest in their own training. They are mainly responsible for passenger safety as well as ancillary revenues onboard 6.6 Physical Evidence They pay as little as possible for their aircraft. Planes are the most expensive asset that an airline can make. They get big discounts on aircraft because they buy them when other airlines dont want them, for example after September 11th, or on the invasion of Iraq and Afghanistan. Aircraft manufacturers cannot simply stop a supply chain in minutes. If orders are being cancelled or delayed, this is when to buy. It was rumored within the industry that Ryanair was buying Boeing 737s list price around  £40,000,000 (forty million pounds) with up to a 50% discount. 6.7 Process There is no check in. You simply show your passport and supply your reference number. You cannot select a preferred seat. It is first come, first served. This aids speed. There are no air bridges (the tunnel that connects to the side of the aircraft when to board it). You walk or are bused to the aircraft. Baggage is deposited directly onto the terminal its quick. However if your bag is broken dont expect high levels of customer service. Question 7 7.1 Cultural factors Ryanair has addressed a global cultural need for leisure travel by making their prices extremely low and the easy availability of tickets operating between two points. One of the factors that influence consumer behavior is social class such as people’s income. Ryanair get most of their business from lower income group. 7.2. Social factors One the factors that influence consumer factors is the social factors such as consumers small groups family and social roles. According to the case study Ryanair make use of buzz marketing by their controversial promotions. This influences people opinions about their services as it gets people to discuss the controversial promotions. 7.3 Personal factors Personal factors are influenced by personal characteristics such as customer’s age and life cycle stage, occupation, economic situation, life style and personality and self-concept. The people that would be influenced into buying Ryanair’s would need to have an easy going personality and not be concerned much about the service of the airline since many of the luxuries are removed from the service. 7.4 Psychological factors A person’s buying choices are further influence by four psychological factors motivation, perception, learning and beliefs and attitudes. Customers that would be influences to use Ryanair are customers that believe that are getting value for money through the low cost pricing. Question 8 Consumer market consists of individuals and households that buy goods and services for their personal consumption. These would normally be consumer goods such as soft drinks, cosmetics, travel and household goods. Ryanair’s consumer market is the individuals in the European region that use air travel as a form of transportation. Question 9 Below is an example of Ansoff’s Matrix which shows growth strategies that organisations can use to expand their operation followed by the explanations for each growth strategy (Riley, 2012). Figure 1 Ansoff’s matrix. Sourced from Riley (2012) 9.1 Market penetration Market penetration is when the company expands in the same market using the same products. For Ryanair, market penetration would involve increasing the number of flights in the same routes. This way they are in the same markets and using the same service. 9.2 Market Development Market development requires the companies to enter new markets while using the same products. For Ryanair, this would require the company to go to new markets such as Africa, Asia or America using the same low cost air travel service. 9.3. Product Development Product development means that in order to expand the company must introduce new products or services in the existing market. For company like Ryanair, product development would mean that they introduce new service such as business class or first class into the existing market. 9.4 Diversification Diversification is when the company seeks to enter into new markets with new products. For Ryanair diversification could mean that the company introduces new services such as leisure sea cruising. This would also mean that the company moves into a new market since leisure sea cruising would require different destinations and customer base. References Riley, J. 2012. Ansoff Matrix. [online]. Available at: http://www.tutor2u.net/business/strategy/ansoff_matrix.htm [Accessed on 02 September 2013]. Kotler, P. and Armstong, G. 2012. Principles of marketing. 14th edition. Essex: Pearson.