On January 1 of this year, our company received information about the spot rate of Malaysian ringgit (MYR) to USD to be 3.13 MYR on April 1; however, on April 1, it became 3.52 MYR. Our team conducted an analysis about the importance of foreign currency exchange for our trade in Malaysia. The main objective of this memo is to demonstrate the results of our evaluation and show that currency exchange is a viable and profitable option for our firm.
The profitability of transactions in international marker is influenced by foreign currency exchange. Since our company has sales contracts with different vendors, we have an obligation to sell a specific number of units that are shipped to Malaysia during the first quarter. Specifically, the firm must sell 4,000 units for 1.25 million MYR within the specified period. Since retailers make payments in their local currency, fluctuation in the exchange rate between MYR and USD may affect our profit. Although we could establish the so-called producer currency pricing to make the customers purchase in USD, it may result in the complete market loss (Monetary and Economic Department [MED], 2018). Therefore, it is essential to maintain international currency exchange because minor alterations MYR/USD rate should not affect its profit.
This memorandum will review three scenarios: adjusting for currency fluctuations, using a fixed rate mentioned in the contract, and avoiding currency exchange by purchasing raw materials in MYR. Firstly, our company could use the spot rate of 3.52 on April 1 to convert its sales revenue in MYR to USD. If the rate was 3.13 MYR per one USD in January, then there was 0.39 points increase on April 1. If 1.25 million MYR is converted to USD in April’s rate, there is a $44,247 loss. Secondly, our firm can lock up January’s rate of 3.13 MYR/USD and thus convert 1.25 million MYR using this value; in this case, the company will have a $44,247 profit. Lastly, the third scenario prevents any currency exchange, avoiding the loss, but it also does not allow a profit.
Although the second case seems to be the most profitable, our firm should consider local retailers’ interests to avoid losing customers. Indeed, currency fluctuation is an inevitable part of the foreign exchange market. Our calculations showed that there is a short-term benefit in converting to USD by a fixed rate. However, there is no actual long-term profitability in reducing domestic currency because the exchange value may go below the ones indicated in a contract (MED, 2018). Therefore, our primary suggestion was to buy raw materials using local currency, which would minimize exchange risks. Nevertheless, after completing calculations for the first two scenarios, we believe that keeping an equal share of USD and MYR will be profitable both in short and long perspectives.
In summary, this memo reviewed the issue of currency fluctuations and the risks of exchange for our firm in the Malaysian market. Considering the available literature and our calculations, we suggest purchasing raw materials using ringgit. At the same time, we recommend having a one-to-one ratio of the U.S. dollar and MYR in this market because the currency conversion brings short-term profit at times when the value of USD rises. If you have any doubts about our proposal, please email us directly. You can also bring your questions to our meeting that will be held in the conference room on February 10, 2022.
Reference
Monetary and Economic Department. (2018). The price, real, and financial effects of exchange rates. BIS Papers, 96, 1-148.