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Question Description: Suppose a U.S. wood-products company has facilities and employees in Canada providing its raw materials (wood), but has most of its sales in the United States.(1) What are the most important operational and financial risks in this arrangement? (2) How can the company pay its Canadian employees, who presumably want Canadian dollars, when its U.S. customers are paying in U.S. dollars? Furthermore, how can it calculate its profit if revenue is in U.S. currency and most of its costs are in Canadian currency?
Answer previewThe wood-product Company with employees and facilities in Canada but has most of its sales in the US is likely to operate on international frameworks. This means the operational and financial risks experienced comprise of foreign exchange risks. Exchange rate fluctuations have a high probability of affecting operating income and sales in this arrangement. According to Lionais, Murray, and Donatelli (2020), Canada has a high demand for labor, which creates a competitive advantage for companies sourcing labor and other operating factors in the country. This means, in this arrangement, the Company is experiencing low production costs due to the workforce’s efficiency. Thus, foreign exchange fluctuations cause financial and operational risks because the exchange rates influence profits earned in the foreign country( Canada in this case) and revenues in the US. In other words, the volatility of the exchange rate causes operational and financial risks.
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