MANAGING VOLATILE EXCHANGE RATES IN GLOBAL SOURCING.
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Transcript of MANAGING VOLATILE EXCHANGE RATES IN GLOBAL SOURCING.
MANAGING VOLATILE EXCHANGE RATES IN GLOBAL SOURCING
IMPORTANCE OF EXCHANGE RATES IN INTERNATIONAL SOURCING
EXAMPLE: U.S. Firm |Japanese Supplier
12 equal payments of 20.248 M Yen eachCurrent Rate: 202.48 Yen/$
IMPORTANCE OF EXCHANGE RATES IN INTERNATIONAL SOURCING (cont)
Month
Projected Yen
ExpenditureExchange
Rate
Actual U.S. Dollars Needed
1 24.248 M 202.48 100,000.00 2 " 192.30 105,293.80 3 " 180.15 112,395.20 4 " 180.45 112,220.80 5 " 169.63 119,365.60 6 " 174.10 116,300.90 7 " 161.10 125,685.90 8 " 153.65 131,780.00 9 " 155.50 130,212.20 10 " 154.30 131,224.80 11 " 163.50 123,840.90 12 " 162.10 124,910.50
TOTAL $1,433,230.60
U.S. DOLLAR CONTRACT EXPOSURE
WITHIN A YEAR THE APPRECIATED YEN INCREASED SOURCING COST BY ~ 20%
APPROACHES FOR MANAGING EXCHANGE RATES FLUCTUATIONS IN GLOBAL SOURCING
MACRO-LEVEL STRATEGIESAffect the Sourcing Decision itself or Pertain to the Volume-Timing of Purchase
MICRO-LEVEL STRATEGIESEmployed after the source has been selected and are used to protect the buyer from the risk of exchange rate fluctuations
MICRO-STRATEGIES
PROPORTION OF USE
1 PAYMENT IN U.S. DOLLARS (Risk Avoidance)
0.85
2 BUYING FOREIGN CURRENCY FORWARD (Risk
Avoidance)
0.20
3 BUYING FOREIGN CURRENCY FUTURES (Risk
Minimization)
0.35
4 RISK SHARING CONTRACT AGREEMENT
0.55
5 PAYMENT IN SUPPLIER CURRENCY
0.05
COMPARISON OF APPROACHES: COST IN U.S. DOLLARS FOR THREE PLANNING CASES
10% DECREASE UNCHANGED 10% INCREASE(2.1765DM/$) (2.4580DM/$) (2.7394DM/$)
PAY IN US$ 983,808$ 983,808$ 983,808$
BUYING FORWARD
1,000,207$ 1,000,207$ 1,000,207$
FUTURES 982,120$ 985,800$ 988,090$
RISK-SHARING (50-50)
1,038,464$ 983,808$ 939,090$
RISK-SHARING ("Window")
1,064,354$ 983,808$ 915,666$
BASELINE (SUPPLIER'S CURRENCY)
1,093,120$ 983,808$ 894,371$
BUYING POWER OF US$
MACRO-LEVEL STRATEGIES
1. USING EXCHANGE
RATES IN THE SUPPLIER
SELECTION DECISION
2. USING EXCHANGE
RATES IN THE VOLUME-
TIMING OF PURCHASES
DEVELOP A PORTFOLIO
OF GLOBAL SUPPLIERS
PROPORTION OF USE
0.20
N/A
0.10
SUPPLIER SELECTIONJAPANESE YEN CONTRACT: 15.365 MKOREAN WON CONTRACT: 88.41 M
Order # Exch Rate U.S. $ Needed Exch. Rate US $ Needed(Yen/S) (W/$)
Aug 1 1 153.65 100,000.00 804.1 100,000Aug 15 2 153.87 99,857.02 884.8 99,920.89
3 153.80 99,902.47 880.7 100,386.064 155.25 98,969.40 879.3 100,545.895 154.30 99,578.74 879.1 100,568.766 154.40 99,514.25 860.0 102,802.337 161.40 95,198.27 874.0 101,155.618 163.50 93,975.54 874.0 101,155.619 164.00 93,689.02 868.9 101,749.3410 162.10 94,787.17 867.5 101,913.5411 163.10 94,206.01 867.3 101,937.0512 158.10 97,185.33 861.4 102,635.2413 153.40 100,162.97 858.1 103,029.9514 153.50 100,097.72 857.9 103,053.9715 153.60 100,032.55 856.3 103,246.5316 153.66 99,939.49 855.8 103,306.8517 152.30 100,886.41 855.0 103,403.5118 147.20 104,381.79 851.8 103,791.9719 142.80 107,598.04 844.3 104,713.9620 139.75 109,946.33 844.3 104,713.9621 139.55 110,103.91 835.2 105,854.89
May 22 22 140.67 109,227.27 831.1 106,377.092,109,239.70 2,256,263.00
VOLUME-TIMING PURCHASES (EXAMPLE)
USE FORWARD BUYING POLICY WHEN THE VALUE OF THE YEN IS INCREASINGUSE SHORT-TERM PURCHASING POLICY WHEN THE VALUE OF THE YEN IS DECREASING