Japan, Europe and USA in the case study are facing exchange rate risk. It is the probability of the business capability strength being altered due to currency being traded with due to the different international exchange rates. It represents the possible direct loss in the organization cash flows, stock market value from an exchange rate currency. Finance experts view companies as autonomous entities for competitive advantage from internal resource capabilities and external sources. An international firm will either experience transaction, translation or economic risk and exposure on the exchange rates.
1. Are the Japanese customers of Neffco Designs likely to be willing to accept price quotations in dollars? The Japanese mostly will not be willing to accept price quotations in dollars. They are the majority buyers comprising of approximately 35% against the Europeans at 10% and this is a large market share to be lost by the selling company. In the past years Japan has had many structural problems and has experienced recession. A good understanding of the effect of dollar prices quotations on the products demand is very essential for the company success, growth and development (Iroegbu, 2006).
A difference in buying and selling percentages with the charge gain percentage always impact the business strength. Therefore, an even slight change in price of a commodity will cause a change in its demand. With prices quoted in dollars, sudden shift on the consequence amount compromise business growth and its competitive position and disrupt cash flows (Horne, 2004). Japanese have a choice of going for the selling company competitors products. The move will be a big blow to Neffco Designs due to loss of customer credibility, market share and growth. It tends to also reduce their competitive advantage they had before.
Thus they will be forced not to quote their prices in dollars. 2. What should be the company’s objective in managing the exchange rate situation? An objective entails a specific purpose that can be reasonably achieved within an expected period with the available resources. It has to be specific, measurable, achievable, time oriented and realistic. The company should identify and measure the exchange risks that it is exposed to (Stuart, 2007). In the case study presented, the organization is facing transaction, translation and economic risks in relation to the US dollar, Japanese yen and Europeans euros.
With the identification and measurement of the risks, the company needs to develop a strategy to handle the risks found. They have to create a centralized entity that will be forecasting on the exchange rates, hedging approach mechanisms, and cost of currency hedging and procedures of accounting regarding currency risk (Johnson, & Devonish, 2009). With this, rules and controls ought to be developed to oversee the currency conversion percentage risk with good measures taking. It will include checking every day the customer’s money values for performance hedging. 3.
What model or system would you recommend that Neffco Designs use? Explain why. They should choose a model that offers competitive pricing, timely and efficient trade execution. I would recommend they choose forward exchange contract which will be an agreement by Neffco Designs and Japanese to sell and buy respectively a commodity at a specified future time with a specified price agreed upon today. The payments of the instruments take place before its control and ownership shifts. It is advantageous as it has an effective hedging mechanism that protects an entity from unfavorable exchange rates.
The budgeting and costing are always accurate and the exact value of the export and import order can b calculated on the day it is processed. The major disadvantage the model posses is a currency exchange rate fluctuations (Kurihara & Nezu, 2006). They can not take advantage of favorable exchange rates movements as long as it has covered a forward exchange contract transaction. 4. Is your choice in question 3 something that the company should do for all the foreign currencies that it might have to manage or only for the Japanese? Explain. The Japanese are their major customers, thus they should do it for them alone.
Doing for all foreign currencies, is a big risk. No international exchange rate on any country’s currency will assure unchangeable percentages and thus not put together market share and finance strength. Damage will be reduced through effective regulation and control over the destabilizing exchange rates in cash flow (Stuart, 2007). The exchange rate market instruments depend on place of the currency and the economic situation. It will enable modification of procedures on carrying out international trades using agreed money and the market rules.
Conclusions All exporters and importers experience exchange rates risks and exposures. It could either lead to another party gaining and the other loosing. Thus there should be a high investment on studying the markets of the different international customers a company has. References Johnson, C. & Devonish D. , (2009). “An exploratory study of competitive strategies among hotels in a small developing Caribbean state” International journal of contemporary hospitality Management: Emerald Group Publishing Limited. Stuart H. , (2007).
“The response of industry stock returns to market exchange rate and interest rate risks”. Managerial finance: Emerald Group Publishing Limited Kurihara Y. & Nezu E. (2006). “Recent stock price relationships between Japanese and US stock markets. ” Studies in economics and finance: Emerald Group Publishing Limited. Iroegbu H. G. , (2006) “The effects of Airfares and Foreign Exchange Rates on Global Tourism” Advances in hospitality and leisure: Emerald Group Publishing Limited Jocelyn Horne, (2004) “Eight conjectures about exchange rates” Journal of economic studies: Emerald Group Publishing Limited