Abnormal Deviation in international exchange
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You are a Finance Manager at a company in your city. Your company purchase goods from international markets. You are planning to buy equipment worth AED55 million. You have decided to save the company some money and you have proposed to check the exchange rate for 5 days at www.xe.com for the currency of the country where you want to buy the equipment.
You managed to secure two quotations from different suppliers from different countries using different currencies. The equipment is needed in January 2015. Transportation cost AED5 million and is paid in here to a UAE transportation company. The balance amount should be used to purchase the equipment. The transportation of the equipment is agreed to be arriving in UAE on the 5th of January 2015. It takes 3 days to fly the equipment to UAE. Whatever purchasing you are planning should be done in advance to give room for transporting the equipment.
The foreign supplier has agreed to give you a quotation for the equipment that is valid for 7 days. You want to take advantage of the quoted prices. The Equipment is quoted in both British pounds and in Euros. The Equipment is costing BP£860 000 and it is also quoted in EURO€ 1 090 000. You had a meeting with your CEO and you both agreed to check the market performance of these two currencies and purchase the equipment when it is giving you a competitive advantage.
The Activities to do:
Check the exchange rate for a period of 5 days and create a table of comparisons of how much will be your Dh50m worth on each of the five days in both Euros and GB pounds. Choose the currency you will use for your transactions. [15 marks]
Calculate how much it will cost the company in Dirhams to buy the equipment on the first day of monitoring the exchange rate. Explain the impact of your action. [15 marks]
Calculate how much it will cost the company in Dirhams to buy the equipment on the second day of monitoring the exchange rate. Explain the impact of your action. [15 marks]
Calculate how much it will cost the company in Dirhams to buy the equipment on the third day of monitoring the exchange rate. Explain the impact of your action. [15 marks]
Calculate how much it will cost the company in Dirhams to buy the equipment on the fourth day of monitoring the exchange rate. Explain the impact of your action. [15 marks]
Calculate how much it will cost the company in Dirhams to buy the equipment on the fifth day of monitoring the exchange rate. Explain the impact of your action. [15 marks]
Write a report to support your decision for the transaction you have done. In your recommendation outline what makes your decision the best decision for the company. Consider every day you were monitoring the currencies, as the day you made a decision and purchased that equipment. Was that the best decision and why? [10 marks]
Solution
Table of comparison
Conversion of DH to GBP
1dh = 0.173796 GDP
50,000,000 × 0.173796
GBP = 8,689,800
Conversion of DH to EURO
1DH = 0.221629 EURO
50,000,000 × 0.221629
EURO = 11,081,450 change
Days Value of
EURO
(+ 1.44) Change in value % change Value of POUND (+0.3885) Change in value % change
1 11,241,023 159,573 1.44 8,723,516 33,716 0.388
2 11,402,894 161,870 1.46 8,757,363 33,747 0.390
3 11,567,096 164,202 1.48 8,791,342 33,979 0.391
4 11,733,663 166,566 1.50 8,825,452 34,110 0.393
5 11,902,627 168,965 1.52 8,859,695 34,243 0.394
Will use EURO as my currency in the transactions.
Cost of the equipments on the first day in DH.
101.44100 × 1,090,000 = € 1,105,696
1 DH = 0.221629
1,105,696 ÷ 0.221629
= DH 4,988,950.
Impact
The exchange rate create a positive impact in difference in the price of equipment with an increase of DH 75,300.
Cost of the equipments on the second day in DH.
Purchases costed = € 1,090,000
100 + 1.46%
= 101.46%
101.46100 × 1,090,000 =€ 1,105,914
1 DH = 0.221629
1,105,914 ÷ 0.221629
=DH 4,989,934
Impact
The exchange rate create a positive impact in difference in the price of equipment with an increase of DH 76,284.
Cost of the equipment on the third day in DH
Purchases costed = € 1,090,000
101.48100 × 1,090,000 =€ 1,106,132
1 DH = 0.221629
1,106,132 ÷ 0.221629
=DH 4,990,917
Impact
The exchange rate create a positive impact in difference in the price of equipment with an increase of DH 77, 267.
Cost of the equipment on the fourth day in DH
Purchases costed = € 1,090,000
101.50100 × 1,090,000 =€ 1,106,350
1 DH = 0.221629
1,106,350 ÷ 0.221629
=DH 4,991,901
Impact
The exchange rate create a positive impact in difference in the price of equipment with an increase of DH 78,251.
Cost of the equipment on the fifth day in DH
Purchases costed = € 1,090,000
101.52100 × 1,090,000 =€ 1,106,568
1 DH = 0.221629
1,106,568 ÷ 0.221629
=DH 4,992,885
Impact
The exchange rate create a positive impact in difference in the price of equipment with an increase of DH 79,235.
REPORT ON DECISION FOR TRANSACTION FOR PURCHASING EQUIPMENTS
The above transaction was appropriate since it has brought a good comparison between the exchange rate in both quotations AED/EURO.
Findings
It can be observed that by use of this transaction the finance manager can be able to save for the company. The transaction of this equipment will take less than AED 50 millions
Conclusion
This method is best used when carrying out official transaction for example which government is involved.
Recommendation
This kind of transaction should be encouraged since it help in stabilizing the country currency. We find that the effect of exchange rate behave differently in the five days meaning that in each an everyday the currency get an additional value. It hence strengthens currency.
References
The great Soviet Encyclopidia, 3rd edition (1970 – 1979)[email protected]. The gale group, IncCassel Guster (DSecember 1918) “Abnormal Deviation in international exchange,” 28, No 112. The economic journal. Pp.413 – 415.UBS’S “prices and earnings” report.