Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Maitland, Florida, Yohe usually must buy its raw materials in several different foreign countries using several different foreign currencies. The matter is further complicated because Yohe often sells its products in other foreign countries. One product in particular, the SY-20 radio transmitter, draws Component X, Component Y and Component Z (its principal components) from Hong Kong, Indoneisa, and Malaysia, respectively. Specifically, Component X costs 165 Hong Kong dollars, i Component Y costs 20 Indonesia rupiah, and Component Z costs 105 Malaysian ringgit. The largest market for the SY-20 is Japan, where the product sells for 42,000 Japanese yen. Naturally, Yohe is intimately concerned with economic conditions that could adversely affect dollar exchange rates. You will find Tables 19-1, 19-2, and 19-3 useful for completing the problem. First, we will want to lay out the necessary data for our problem. We have constructed abridged versions of Tables 19-1 and 19-3 (later in the model) to fit our needs for this problem. TABLE 19-1 (abridged) Exchange rates of select major currencies, relative to the U.S. dollara Direct Quotations Indirect Quotations 3.4705 0.2881 0.0001 9696.6900 Malaysian ringgit Indonesia rupiah Japanese yen Hong Kong dollar 0.010900 0.1290 91.34 7.7502 a WSJ Online, Sep 17, 2009. Key Currency Cross-Exchange Ratesb Dollar Ringgit Rupiah Yen HKS 2.2250 0.0850 7.7500 91.15 0.0008 0.01 26.17 Hong Kong Japan Indonesia Malayisa United States 2782.0041 106.3083 9689.9985 3.4831 11.76 1250.3224 0.4494 0.1290 0.0004 0.0001 0.0382 0.0110 0.2871 b From http://www.xe.com/ict/, using historical date of Sep 17, 2009. a. How much in dollars does it cost for Yohe to produce the SY-20? What is the dollar sale price of the SY-20? Input Data Cost of component X (in HK dollars) Cost of component Y in rupiah) Cost of component Z (in ringgit) Sale price of the SY-20 (in yen) HK$165 Rp 20 R105 742,000 We will convert the cost of each component to dollars, and find the total cost of the SY-20. We will do the same to find the dollar sale price. Cost in HK$ Direct spot exchange rate Component X Cost of X in $ Cost of Xin $ Cost of X in $ X Cost in Rp Direct spot exchange rate Component Y Cost of Y in s Cost of Y in $ Cost of Y in $ X Cost in RM x Direct spot exchange rate Component Z Cost of Z in s Cost of Z in s Cost of Z in s x TOTAL COST OF THE SY-20 (in dollars) Price in yen Direct spot exchange rate Revenue from sale of the SY-20 Sale price (in yen) Sale price (in yen) Sale price (in yen) SY-20 SALES PRICE (in dollars) = b. What is the dollar profit that Yohe makes on the sale of the SY-20? What is the percentage profit? The dollar profit from the sale of the SY-20 is simply the sales revenue minus the total cost. Sales price Total cost Dollar profit = Dollar profit = Dollar profit = The percentage profit is determined as the dollar profit divided by the total cost. S profit Total cost % profit % profit % profit - c. If the U.S. dollar were to weaken by 10% against all foreign currencies, what would be the dollar and percentage profits for the SY-20? If the dollar were to weaken by 10% against all currencies, that could be expressed by multiplying the direct quotations of foreign exchange rates by (1-%change), to reflect a 10% decrease in purchasing strength. Since there is a weakening of the dollar, the % is negative. Change in dollar strength against all currencies We will reproduce the table from the top of the spreadsheet, but we will add a column for the new exchange rates. Direct Indirect New Direct Quotations Quotations Quotations 0.2881 3.4710 0.0001 9708.7379 Malaysian ringgit Indonesia rupiah Japanese yen Hong Kong dollar 0.010900 91.74 0.1290 7.7519 Now, we will recompute the component costs and sales price of the SY-20. Cost in HKS Direct spot exchange rate Component X Cost of X in s Cost of X in s New cost of X in $ - Cost in Rp x Component Y Cost of Y in $ Cost of Y in $ New cost of Y in S Direct spot exchange rate x Component z = Cost in RM Direct spot exchange rate Cost of Z in $ Cost of Z in s New cost of Z in S TOTAL COST OF THE SY-20 (in dollars) = $0.00 Price in yen Direct spot exchange rate Revenue from sale of the SY-20 Sale price (in yen) Sale price (in yen) Sale price (in yen) SY-20 SALES PRICE (in dollars) = The dollar profit from the sale of the SY-20 is simply the sales revenue minus the total cost. Sales price Total cost Dollar profit = Dollar profit = Dollar profit = The percentage profit is determined as the dollar profit divided by the total cost. Sprofit Total cost % profit = % profit = % profit = From this exercise, we see that since all costs and revenues are generated overseas, an across the board weakening of the dollar does not result in any decreased profitability for Yohe's SY-20. The lack of decreased profitability may seem surprising because of the significant increase in cost of the SY-20, but remember that same increase was observed in the sales price of the SY-20. d. If the U.S. dollar were to weaken by 10% only against the Japanese yen and remained constant relative to all other foreign currencies, what would be the dollar and percentage profits for the SY-20? Once again, we must reconstruct the currency table from the top of the worksheet. This time, however, we will only be changing the exchange rate for the yen. Again, we will be multiplying the old rate by (1-%change). Since there is a weakening of the dollar, that % is a negative number. Change in dollar strength against Japanese yen Direct New Direct Quotations Quotations Indirect Quotations 3.4710 9708.7379 0.2881 0.0001 Malaysian ringgit Indonesia rupiah Japanese yen Hong Kong dollar 0.010900 0.1290 91.74 7.7519 Now, we will recompute the component costs and sales price of the SY-20. Change in dollar strength against all currencies We will reproduce the table from the top of the spreadsheet, but we will add a column for the new exchange rates. Direct Indirect New Direct Quotations Quotations Quotations 0.2881 3.4710 0.0001 9708.7379 Malaysian ringgit Indonesia rupiah Japanese yen Hong Kong dollar 0.010900 91.74 0.1290 7.7519 Now, we will recompute the component costs and sales price of the SY-20. Cost in HKS Direct spot exchange rate Component X Cost of X in s Cost of X in s New cost of X in $ - Cost in Rp x Component Y Cost of Y in $ Cost of Y in $ New cost of Y in S Direct spot exchange rate x Component z = Cost in RM Direct spot exchange rate Cost of Z in $ Cost of Z in s New cost of Z in S The dollar profit from the sale of the SY-20 is simply the sales revenue minus the total cost. Sales price Total cost Dollar profit = Dollar profit = Dollar profit = The percentage profit is determined as the dollar profit divided by the total cost. $ profit Total cost % profit = % profit = % profit = In this instance, we observe that a weakening of the dollar against the yen (all else equal) will result in increased profitability for Yohe. The reason is that the sales price is denominated in yen and the yen is now 10% more valuable than the dollar. e. Using the 180-day forward exchange information from Table 19-3, calculate the return on 1-year securities in Switzerland assuming the rate of return on 1-year securities in the U.S.is 4.9%. Applying interest rate parity, we can determine the return on 1-year securities in Switzerland. From this exercise, we see that since all costs and revenues are generated overseas, an across the board weakening of the dollar does not result in any decreased profitability for Yohe's SY-20. The lack of decreased profitability may seem surprising because of the significant increase in cost of the SY-20, but remember that same increase was observed in the sales price of the SY-20. d. If the U.S. dollar were to weaken by 10% only against the Japanese yen and remained constant relative to all other foreign currencies, what would be the dollar and percentage profits for the SY-20? Once again, we must reconstruct the currency table from the top of the worksheet. This time, however, we will only be changing the exchange rate for the yen. Again, we will be multiplying the old rate by (1-%change). Since there is a weakening of the dollar, that % is a negative number. Change in dollar strength against Japanese yen Direct New Direct Quotations Quotations Indirect Quotations 3.4710 9708.7379 0.2881 0.0001 Malaysian ringgit Indonesia rupiah Japanese yen Hong Kong dollar 0.010900 0.1290 91.74 7.7519 Now, we will recompute the component costs and sales price of the SY-20. Cost in HKS Direct spot exchange rate Component X Cost of X in $ Cost of X in s New cost of X in S = Cost in Rp Direct spot exchange rate Component Y Cost of Y in $ Cost of Y in $ New cost of Y in $ Cost in RM x Direct spot exchange rate Component z Cost of Z in s Cost of Z in s New cost of Z in $ x 1 TOTAL COST OF THE SY-20 (in dollars) - Price in yen Direct spot exchange rate Revenue from sale of the SY-20 Sale price (in yen) Sale price in yen) Sale price (in yen) SY-20 SALES PRICE (in dollars) = The dollar profit from the sale of the SY-20 is simply the sales revenue minus the total cost. Sales price Total cost Dollar profit = Dollar profit = Dollar profit = The percentage profit is determined as the dollar profit divided by the total cost. $ profit Total cost % profit = % profit = % profit = In this instance, we observe that a weakening of the dollar against the yen (all else equal) will result in increased profitability for Yohe. The reason is that the sales price is denominated in yen and the yen is now 10% more valuable than the dollar. e. Using the 180-day forward exchange information from Table 19-3, calculate the return on 1-year securities in Switzerland assuming the rate of return on 1-year securities in the U.S.is 4.9%. Applying interest rate parity, we can determine the return on 1-year securities in Switzerland. TABLE 19-3 (abridged) Forward exchange rates for the Swiss franc Spot Rate 30 days 30 days 0.1296 Forward Rates on de 90 days 0.1294 180 days 0.1299 Hong Kong dollar 0.1290 Using our knowledge of interest rate parity, the following problem is set up. Note that the U.S. nominal rate is on an annual basis. Spot direct exchange rate 7.7519 Forward direct exchange rate (180 days) 7.6982 Home nominal annual interest rate 4.9% Time to maturity on securities in years) 0.5 ft/e0 (1+r h/2)/(1+r f/2) 1+ rf/2 f. Assuming that purchasing power parity (PPP) holds, what would be the sale price of the SY-20 if it was sold in England rather than Japan? Purchasing power parity allows us to establish the following problem. Price in yen Yen/pound exchange rate = (Pn) X (el) (co) X (Pf) (PR) (in pound)