Questions On Exchange Rate Fluctuations Essay

Questions On Exchange Rate Fluctuations Essay

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(c) A consideration of the key risk factors that are relevant to the decision whether to undertake the investment, with suggestions on how these risks might be managed.

1. Exchange rate fluctuation risk
Exchange rate fluctuations come in three forms, which is economic exposure, transaction exposure and translation exposure. Exchange rate movements will lead the cash flows become more volatility. First, “Economic exposure – This is lesser known than the previous two, but is a significant risk nevertheless. It is caused by the effect of unexpected currency fluctuations on a company’s future cash flows and market value.” (Investopedia, 2014) It may influence the company’s sale volume, sale price and raw material cost of the copper. Second, “Transaction exposure – This arises from the effect that exchange rate fluctuations have on a company’s obligations to make or receive payments denominated in foreign currency in future.” (Investopedia, 2014) when Zinto use the foreign currency to make the transaction, it may lose money when Sodoria currency‘s exchange rate changes. Last but not least, “Translation exposure – This exposure arises from the effect of currency fluctuations on a company’s consolidated financial statements, particularly when it has foreign subsidiaries.” (Investopedia, 2014) when Zinto calculate the balance sheet and financial statements, they need to translate to reporting currency. In this process, Zinto will suffer a great loss by exchange rate fluctuation.

Management suggestions:
First, we can accord the condition happened in the real life to modify the sales volume, and adjust the proportion of the debt and the reliance of the suppliers properly. Second, we can use hedge techniques, such as forward hedge, fut...

... middle of paper ...

.... But a joint venture company has more these risks than the local company. It means the Zinto may have conflict with Milton in the future which we cannot forecast.
All in all, in my opinion, I do not suggest the Zinto plc go ahead with the proposed joint venture. Not only the numerical analysis based on the discounted cash flow of the net present value (NPV) shows the profit will be negative if Zinto continue to take the joint venture, but also there are many uncertainty risks, such as the inflation rate fluctuation, the political problem, the culture deference and the human resources management risk, will happen in the future. No one can ensure the Zinto can make more profit if it continues the joint venture than sell the shares to Milton according to the analysis, so I take the suggestion that Zinto should sell the 45% shares to Milton at the end of the six years.

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