Exchange Rates You Own And Operate A Chain Of Electronics St

Exchange Ratesyou Own And Operate A Chain Of Electronic Stores In Te

You own and operate a chain of electronic stores in Texas and you are considering expanding your inventory to include tablet work stations for small businesses. There is only one supplier of the brand of tablets you would like to stock in your store, and that firm is located in Mexico. You have researched the current spot and forward rates between the U.S. and Mexico, as indicated in Table-1: TABLE-1 Spot Rate 30-Day Forward 90-Day Forward 180-Day Forward U.S. Dollar/Peso 1.7851 1.7052 1.8051 1.7555 Peso/U.S. Dollar ? ? ? ?

Questions: Complete the Peso/U.S. Dollar row in Table-1 and explain your methodology. If you agree to pay 2-million pesos for 100,000 tablets at today’s spot rate, how much would you pay in U.S. dollars? If you agree to pay 2-million pesos but wait 180 days and end up paying the 180-Day forward rate, how much would you be paying for the 100,000 tablets, in U.S. Dollars? Your competitors sell the tablet for $41.20 and you must mark your product up from cost by at least 20% to earn a minimal profit, should you buy the tablets today? Explain your answer. Should you wait to buy the tablets in 30 days at the current 30-day forward rate? Explain your answers.

Paper For Above instruction

Understanding and managing exchange rates is critical for businesses engaged in international trade, particularly when the transaction involves currencies that fluctuate over time. In this case, operating a chain of electronic stores in Texas with a supplier based in Mexico requires careful analysis of currency exchange rates to optimize purchasing decisions and profit margins. This paper explores the methodology for calculating the missing Peso/U.S. Dollar rate, evaluates the costs associated with different payment timelines, and discusses strategic considerations for purchasing from the Mexican supplier.

Completing the Peso/U.S. Dollar Rate and Methodology

The given data presents the U.S. Dollar to Peso (USD/Peso) exchange rate at various future dates: current spot, 30-day, 90-day, and 180-day forward rates. To find the Peso/U.S. Dollar (PESO/USD) rates, consider that these are reciprocals of each other since one represents the amount of Pesos per U.S. Dollar, and the other the amount of U.S. Dollars per Peso.

Given:

- Spot rate (USD/Peso) = 1.7851

To find Peso/USD:

- PESO/USD = 1 / USD/Peso

- PESO/USD = 1 / 1.7851 ≈ 0.5604

Similarly, for the forward rates:

- 30-Day Forward (USD/Peso): 1.7052

- PESO/USD (30-Day Forward) = 1 / 1.7052 ≈ 0.5870

- 90-Day Forward (USD/Peso): 1.8051

- PESO/USD (90-Day Forward) = 1 / 1.8051 ≈ 0.5542

- 180-Day Forward (USD/Peso): 1.7555

- PESO/USD (180-Day Forward) = 1 / 1.7555 ≈ 0.5697

This method hinges on the reciprocal relationship, providing the appropriate exchange rate in Pesos per U.S. Dollar for different time frames.

Calculating the Cost in U.S. Dollars at Current Spot and Forward Rates

The initial transaction involves paying 2 million Pesos for 100,000 tablets. At the current spot rate (USD/Peso = 1.7851), the cost in U.S. Dollars is:

- Cost = 2,000,000 Pesos / 1.7851 ≈ $1,119,639

This calculation is straightforward: dividing the total Pesos by the current exchange rate (Pesos per USD) gives the equivalent USD amount.

If instead, the payment is deferred 180 days at the 180-day forward exchange rate (USD/Peso = 1.7555), then:

- Cost in USD = 2,000,000 Pesos / 1.7555 ≈ $1,139,738

The slight increase compared to today’s cost reflects the expected change in the exchange rate over 180 days, possibly influenced by market expectations, interest rate differentials, or other macroeconomic factors.

Analyzing Profit Margins and Investment Decisions

The cost to the business for each 100,000 tablets depends directly on the exchange rate at the time of purchase. Competitors sell these tablets for $41.20 each, amounting to a total retail price of:

- Retail price = 100,000 x $41.20 = $4,120,000

To determine if purchasing today is advantageous, we must estimate the cost per tablet, including the exchange rate, and compare it with the target markup.

Using the current USD cost ($1,119,639), the per-unit cost is:

- Cost per tablet = $1,119,639 / 100,000 ≈ $11.20

Applying a minimum markup of 20%, the minimum selling price becomes:

- Minimum selling price = $11.20 x 1.20 = $13.44

Since the competitor’s selling price is $41.20, this suggests a significant profit margin for the retailer, assuming only the cost basis is considered.

Decision to buy today: Buying at today's rate and applying the markup yields a selling price well below market price, indicating high profit potential. However, microeconomic factors such as the certainty of foreign exchange rates and potential future rates must be considered before making the purchase.

Waiting 30 days at the forward rate: If the 30-day forward rate (USD/Peso = 1.7052) or the reciprocal (PESO/USD ≈ 0.5870) is considered, the estimated cost becomes:

- USD cost = 2,000,000 / 1.7052 ≈ $1,173,343

This is marginally higher than today’s cost, which might diminish the profit margin or impact profitability if market conditions favor purchasing earlier.

Strategic Considerations and Recommendations

Deciding whether to purchase immediately or wait depends on currency market forecasts, the company's risk appetite, and overall supply chain considerations. If the market expects the U.S. dollar to strengthen against the peso, delaying purchasing might be advantageous, assuming the forward rate reflects market expectations accurately.

Conversely, if the forward rates suggest stability or a weakening dollar, purchasing now ensures cost certainty and safeguards profit margins. Moreover, hedging strategies, such as entering into forward contracts, can be employed to lock in exchange rates and mitigate foreign exchange risk.

Conclusion:

The reciprocal calculation of the Peso/U.S. Dollar rates provides essential insights for informed decision-making. Purchasing immediately at today's rates yields a low-cost base relative to competitors, supporting profit maximization. Waiting could be beneficial if future rates improve, but it entails exchange rate risk. Ultimately, companies should consider market forecasts, hedging options, and their risk tolerance when making such international procurement decisions.

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