Involvement of Bank and Foreign Trade - Assignment Example

Research Methods for Business Executive Summary The objective is to identify the role of the banks in case of global trade. At the same time, the study has also identified the risk involved in case of foreign trade. In this regard, the case of USASuperCars provides adequate understanding about exchange rate risks and the procedures based on which such risks can be mitigated. Based on the analysis of the case, it has been identified that involvement of bank is highly essential in case of global trade operation. At the same time, it is also depicted that foreign exchange rate may influence the business revenue in both ways positive and negative in the long run. Apart from this based on the study, it has been recognized that during the global trade, companies are facing several kind of risks from the global market place, which may be in terms of political aspects, economical aspects and commercial aspects. Table of Contents Executive Summary 2 Introduction 4 Question 1 5 Question 2 6 a) 6 b) 6 Question 3 7 a) 7 b) 7 Question 4 8 Question 5 8 Question 6 9 Question 7 9 Question 8 10 Question 9 11 Question 10 12 Conclusion 13 References 14 Introduction USASuperCars has been selling luxury sports cars. The company has developed a contractual agreement for selling cars to customers on a global context. In this respect, the intention of the article is to highlight information relating to foreign exchange along with the concept of global trade. Moreover, the study identifies the role of the bank in the sphere of exchange rate policy. At the same time, the involvement of risks in the foreign trade has been also discussed. In this assignment, selling prices of the USASuperCars has been given below along with the name of the countries. Thus, the aim of this assignment is to identify the consequences according to the situation given in the case. At the same time, involvement and occurrences of bank in case of foreign trade has been demonstrated through the study. Question 1 According to the report of the USASuperCars sells, the mean of the total revenue of the sports cars for the global customers are depicted below. Name of the Country Quantity (n) Price Total (X) UK 12 $72206.49 $866477.88 Japan 1 5 $73687.49 $368437.45 Japan 2 3 $78950.88 $236852.64 Canada 1 1 $85091.46 $85091.46 Canada 2 3 $87723.15 $263169.45 South Africa 2 $369869.61 $739739.22 USA 1 $100000 $100000 Mean ∑ X/n 27 $2659767.84 $98509.92 Based on the above data, the standard deviation of the total revenue is = $307060.8816 Question 2 a) Cost of total Cars = $2659767.84 (Less) Approximate loss for exchange rate (17%) = $452160.39 Expected revenue margin = $2207607.45 In order to identify the probability of exceeding the revenue $ 2,200,000, it can be ascertained that if the company USASuperCars will incur loss approximately around (17%) due to foreign exchange and for other reasons such as distribution purpose, even then the company will definitely be able to ensure a revenue approximately $2,200,000 or more. Rationally, the cost of cars is found to be recorded as $2207607.45, which signifies that during the global trade if the company will perform their trade operation with a loss of 17%, instead of that the company will able to earn a revenue around at least $ 2,200,000. Thus, it can be claimed that the probability is high of exceeding the revenue level $2,200,000 (Niepmann & Schmidt-Eisenlohr, 2014; Economy watch, 2010). b) In order to identify the probability of exceeding the revenue $2,225,000, it can be claimed that if the company USASuperCars will incur loss approximately around (15%) due to foreign exchange and other reasons that include distribution purpose, then the company will be able to ensure revenue of approximately $2,225,000 or more. In this regard, rationally the cost of cars is $2659767.84. In this regard, if the company will incur a loss of $484,767 even then the company can witness at least $2,225,000 revenue. Thus, it can be claimed that the probability is very high of exceeding the revenue level $2,225,000 (Niepmann & Schmidt-Eisenlohr, 2014; Economy watch, 2010). Question 3 a) In order to identify the probability of not exceeding the revenue $2,160,000, it can be identified that if the company USASuperCars may incur loss approximately around (18% - 20%) due to foreign exchange and distribution purpose among others, then revenue of approximately $2,160,000 or more. In this regard, if USASuperCars faces larger problems regarding foreign trade .due to economic and political conditions among others, then the revenue may be less than $2,160,000. Thus, the probability of witnessing revenue less than $2,160,000 is low (Niepmann & Schmidt-Eisenlohr, 2014; Economy watch, 2010). b) Simultaneously, the aim of identifying the probability of not exceeding the revenue margin around $2,130,000, if USASuperCars will incur a loss approximately around (20% - 22%) due to its foreign exchange purpose and other reasons such as distribution purpose, then the company will definitely be able to ensure a revenue approximately $2,130,000 or more. In this context, if the company faces larger problems such as foreign trade, economic and political problems among others, then it may incur loss. As a consequence, the overall revenue margin may be reduced less than $2,130,000. Thus, it can be claimed that the chances of witnessing revenue less than $2,130,000 is very low (Niepmann & Schmidt-Eisenlohr, 2014; Economy watch, 2010). Question 4 USASuperCars estimated revenue margin = $ 2,659,767.84 (Less) the offer made to USASuperCars by HSBC = $2150000.00 Margin value reserved for Exchange Rate = $ 509,767.84 According to the statistical interpretation, it has been recognized that USASuperCars has earned revenue of $2,659,767.84 from its global business operations. In this regard, it has been noticed that HSBC has offered to pay a sum of $2,150,000, based on which the bank is able to have a reserve of exchange rate amounting to $509,767.84. It signifies that the revenue proportion of the company will be reduced to around 19.16 %. In this context, it can be asserted that due to the exchange rate, the overall revenue proportion can be reduced or it may be enhanced. Moreover, the exchange rate may bring approximately 10% changes on the revenue amount in both ways, but it revealed that bank has reserved adequate amount in terms of security in relation to exchange rate. Thus, it can be evidently asserted that the offer, which has been made by HSBC, is not a lucrative offer, as the revenue of USASuperCars will decrease to a substantial amount forn this agreement its (Economy watch, 2010). Question 5 The term “risk-averse” defines not willing to take risk. According to the given scenario, the sales manager of USASuperCars has accepteded the offer, which is made by HSBC. In this regard, the sales manager ensured its revenue margin by accepting the offer of HSBC On the other hand, the CEO of the company does not accept the offer of HSBC, which implies that the CEO of USASuperCars has tried to take risk for profit maximization, because the revenue proportion can be increase due to favorable exchange rate. Thus, based on the given scenario it can be easily claimed that the sales manager of the USASuperCars is more “risk-averse” (Economy watch, 2010). Question 6 According to the report of Economy watch (2010), several risks can be observed during the overseas trade in terms of economic aspects. At the same time, risk can be also observed in terms of political context. Apart from the aforementioned factors, several other risks can be witnessed in terms of commercial aspects. Economic risks may arise due to risk of concession, insolvency, exchange rate and non-acceptance among others. Likewise, political risks include import and export licenses related risk, risk of uncertainty and risk of political sovereignty. On the other hand, commercial risk are related to product related complains. In order to reduce such risks, bank usually issues a letter of credit, which assists business organisations as well as business individuals to consider and reduce all the risks involved in trade for better effective future performance. In this regard, the offer of the sum of $2,150,000 made by HSBC is not only associated with the exchange rate related risk but also with other related risks, which are associated with the foreign trade that include economic, political and commercial risks (Economy watch, 2010). Question 7 In this regard, if the offer made by HSBC is extended for a year rather in case of three month, then it may cause several consequences in both positive and negative ways. According to the viewpoint of Niepmann & Schmidt-Eisenlohr (2014), the statistics has shown that within a span of year, the global financial condition and exchange rate can change in a massive manner. As a consequence, the effect can be observed on the trade performances. In this regard, Niepmann & Schmidt-Eisenlohr (2014) argued that within a one year span of time ‘Bank Rate’ can be changed, which may change the rate of interest of a particular sum. At the same time, trade policies can be also changed dramatically, which may affect the global trading and financing policies. In addition, it may also increase the aggregate risk in case of global trade. On the other hand, within a span of a year, a country can loss its currency price in the global index, which may hamper the stability of economy and can raise inflation rate for that country. Based on these measures, it can be asserted that if HSBC pays the sum in three months’ time rather than in twelve months’ time, then it may create larger differences and difficulties (Niepmann & Schmidt-Eisenlohr, 2014). In this regard, USASuperCars and HSBC would prefer the payment to be made when the economic position of the entire global market remains stable and the company tries to reduce the risk involvement during the global trade operation (Niepmann & Schmidt-Eisenlohr, 2014). Question 8 According to the stated scenario, if USASuperCars on accepting the offer of HSBS with the sum converted into US dollars at the prevailing exchange rates, then the bank will not suffer any loss in this transaction. Rationally, it can be asserted that the overall cost or the selling price of USASuperCars is approximately around $2,659,767.84. In this regard, the bank paying a sum of $2,150,000, which is approximately less than that of the actual cost prices of the cars. Moreover, it is recognised that the bank will have a certain amount of reserve of around $509,767.84 for exchange rate. It signifies that the revenue proportion of the USASuperCars will reduce to around 19.16% for the agreement with the HSBC bank. On the other hand, the company has also ensured its risk involvement in case of foreign trade during performing this agreement with bank. Moreover, it can be also asserted that the company has also witnessed benefits, as it does not invest the security amount for issuing the letter of credit (Niepmann & Schmidt-Eisenlohr, 2014; Economy watch, 2010). In this context, due to this agreement with USASuperCars, HSBC does not incur loss. Rather, it can be claimed that the bank has ensured its position through reducing the risk involvement in terms of exchange rate. In this context, it can be claimed that due to exchange rate, the overall cost of the cars can reduce or it may increase during business transaction. In this regard, the bank has already ensured approximately 19-20% revenue margin during making the agreement with USASuperCars. Thus, the bank does not incurred loss during this agreement. On the other hand, it can be also asserted that the bank is under a high amount of risk in terms of economic, political and commercial aspects (Niepmann & Schmidt-Eisenlohr, 2014; Economy watch, 2010). Question 9 The cost of the car = $ 2,659,767.84 (Less) Bank Investment = $ 2,150,000.00 Bank’s Gross Expected Profit = $ 509,767.84 (Less) Value-at-Risk Involvement (5 %) = $ 25,488.39 Bank’s Net Expected Profit = $ 484,279. 45 Based on the above calculation, it is depicted that the actual selling prices of the cars of USASuperCars is $ 2,659,767.84. On the other hand, HSBC has made an agreement with USASuperCars regarding the cars on an amount of $2,150,000.00. In this context, the bank has reserved an expected profit around $509,767.84, out of which if the bank will incur an expense around $25,488.39, due to the involvement of ‘Value-at-Risk’, then the bank will definitely be able to witness a profit on around $484,279.45 from the transactions of the company. According to the interpretation, it can be depicted that due to the expense occurrence on ‘Value-at-Risk’ the bank has reduced its profit margin by 5%. However, an expected profit around $484,279.45 obtained by the bank will be sufficient for sufficing and managing exchange rate risk (Niepmann & Schmidt-Eisenlohr, 2014; Economy watch, 2010). Question 10 If HSBC decides not to convert all/some of the currencies in twelve months’ time, then the bank can forward the cars in the interbank market for foreign exchange. In the interbank market, the bank will be facilitated with the opportunity of converting the currencies with minimum risk. At the time of exchanging money, the rate at which bank pays is termed as interbank rate. In addition, the interbank rate plays an important in exchanging money with a determined exchange rate (Niepmann & Schmidt-Eisenlohr, 2014; Economy watch, 2010). In addition, the bank is also provided with the option of converting currencies through exchange rate. Exchange rate is identified as a process based on which currencies of different nations are exchanged in international trade (Regents of the University of Colorado, 2014). Conclusion Based on the above analysis, it has been depicted that involvement of bank is highly necessary in case of foreign trade. According to the study, it has been also depicted that several risks such as political, economic and commercial risks are highly involved in case of business. At the same time, it is also identified that foreign exchange rate may affect the revenue proportion in case of business process. Thus, conclusively it can be claimed that the importance of bank is enormous in case of global trade. At the same time, global companies can reduced the involved risk on their business through conducting or executing an agreement with a bank. References Economy Watch, 2010. Risks in International Trade. Economics. [Online] Available at: http://www.economywatch.com/international-trade/risks.html [Accessed November 05, 2014]. Niepmann, F., & Schmidt-Eisenlohr, T. 2014. International Trade, Risk, and the Role of Banks. Federal Reserve Bank of New York Staff Reports, pp. 1-80. Regents of the University of Colorado, 2014. The Foreign Exchange Market. Economics. [Online] Available at: http://www.colorado.edu/Economics/courses/boileau/4999/sec3.PDF [Accessed November 05, 2014]. Read More