Managerial economics
I want you to comment on the posts. Do them separate apa style using scholarly references. Adding substantial agreement
paper 1 ann
Given the situation where a U. S. importer who owes the Belgian company euro 500,000 payable in 30 days from today will make a loss. It means he will have to pay more in dollars to receive the same goods or services, whereas the Belgium exporter will receive more in dollars terms for selling the same goods and services.
To minimize the losses the US importer should undertake hedging. Hedging implies taking a position in the futures market. The objective of hedging is to minimize risk associated with unpredictable changes in dollar/euro rate. In this process both the parties will lock in a particular dollar/euro rate. They will not be exposed to favorable and unfavorable exchange rate movement (street, 2012).
If a US importer has to buy euros in future to make a payment to the Belgium exporter, and he as an importer is concerned on the weakening of US dollar, he should go long on currency futures. This means he should purchase a dollar/euro futures contract as hedging strategy. The US importer will purchase the euro at an agreed rate and date to pay for merchandise to the Belgium exporter regardless to dollars price. This will protect the importer against weakening of US dollar.
If the US dollars strengthens, the US importer could gain from the new rate as he would have to pay less to the Belgium exporter when buying the same amount of goods and services. The Belgium exporter will face losses because he received less in terms of US dollar for the same amount of goods and services. By hedging, both parties can assure themselves of payment and prevent from risk of fluctuating exchange rates in the future (Keat & Young & Erfle, 2014).
Keat, P., Young, P. & Erfle, S. (2014). Managerial economics: economics tools for today’s decision makers. Dickinson College: Pearson
The street, 2012. 5 simple Hedge Strategies for Volatile Times. Forbes. http://www.forbes.com/sites/thestreet/2012/02/27/5…
paper 2 rhon
A US importer who owes and Belgian company 500,000 Euros payable in 30 days from today expects that the US Dollar will weaken during this period. What would you advise the importer to do? What would happen if the imported took your advice yet instead of the dollar weakening, the dollar actually strengthened?
The best advice I would have for the importer is to make the payment as soon as possible if they have the funds available. If the US Dollar weakens, the importer’s payment will in effect increase, costing the importer more money. With capital budgeting, it might be a good idea for the importer to get a fixed conversion rate for a future period with an investment bank with consideration of the time value of money. “There should be a direct relationship between financial leverage and cost of capital requirements and capital budgeting sophistication; in order to provide investors with relatively high rates of returns, firms with high risk are expected to use more sophisticated capital budgeting practices (Shao & Shao, 1996).”
Even if the US Dollar happens to strengthen, the importer could choose to exercise buying currency to recover the losses. The importer could also enter into a currency option which is a contract that allows the buyer the right to buy or sell a certain amount of currency at a specified price during a particular period of time. According to Keat, et al., a company will purchase a call option if it has an obligation to pay in a foreign currency in the future. If the currency goes higher than the strike price, the company can exercise this option. If it falls below, then the company will allow it to expire.
Keat, P., Young, P., & Erfle, S., (2013) Managerial economics economics tools for today’s decision makers, 7th edition, Pearson Education, Inc.
Shao, L. P., & Shao, A. T. (1996). Risk analysis and capital budgeting techniques of U.S. multinational enterprises. Managerial Finance, 22(1), 41-57. Retrieved from https://search.proquest.com/docview/212669275?acco…
don’t only use the text book as a reference. do the papers separate