Your firm operates in Seattle and is signing a contract to supply advisory services to a design firm in Beijing. Your payment is 50 percent on contract signing and 50 percent on completion, which is two years out.
Would you want your payment in dollars or yuan/renminbi for today's portion?
What about the portion on completion? Why?
Foreign Exchange Risk:
Foreign exchange risk exists from the adverse changes in foreign exchange rates that can cause accounts receivable in another currency to decline in value and can cause account payables to increase in value. The risk exists from the fact that GAAP requirements require firms to adjust their foreign exchange payments based on the current spot rate of the home currency with the foreign currency.
Answer and Explanation:
For today's portion I would prefer payment in dollars. In addition, I would want the portion on completion to be paid in dollars. The reason for taking dollars is based on the fact that my firm is located in Seattle and by asking for payment in dollars, I do not have to take upon myself the foreign exchange risk that can exist by receiving payments in a currency other than my own. I would be protecting myself against any adverse changes in the rates between dollars and renminbi.
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fromChapter 1 / Lesson 4
In this lesson, you will explore the various types of risks faced by a business and understand how financial risk is different from other types of risks. Then, you will learn about the different types of financial risks and methods to manage them.