Supplementary Files

Question 1

Appreciation and Depreciation of Foreign Currencies

Answer 1

The exchange rate between the U.S. $ and Japanese Yen are as follows in January and April:

Jan 1 $1 = Yen 250
April 1 $1 = Yen 125

**On January 1, with one dollar you could get 250 Yens. On April 1, one dollar will get you half as many Yens (125).

What happened to the dollar? It has lost value against Yen = It has become weaker against the Yen = Therefore, it has depreciated against the Yen on April 1.

** Let us say you import a product from Japan in January and the Japanese exporter charges you 250 Yens per unit.

How many U.S. $ do you need to come up with in order to pay 250 Yens per unit, at the January 1 exchange rate above? The answer is 1 dollar.

** In April you want to import the same product again and the Japanese company informs you that the price is 250 Yens per unit (no price increase). How many dollars will it cost you to import the same product from Japan (per unit) at the April 1 exchange rate?

To buy/pay 250 Yens you’ll need to come up with $2. Due to the depreciation of dollar in April, it will cost you more in $ to import the same product, even though the price in Japanese Yen has not changed at all.

**If one currency ($) depreciates against another currency (Yen), then the other currency (Yen) must appreciate against the first currency ($). On January 1, buying 1 dollar would cost a Japanese person/company 250 Yens.

In other words, Yen has gained in value against the $ = Yen has become stronger against the $ = Therefore, Yen has appreciated against the $.

Question 2

Closing Case: International Financial Management at Tektronix

Answer 2

*Sales from North America, Europe and Japan

*Part of its success comes from venture capital funding, majority comes from equity financing and debt sources

**International Operations:

First distributor was Sweden. Developed joint ventures. Management prefers to centralize manufacturing. Most of TEKs foreign sales are invoiced in local currencies. If the U.S dollar strengthens against those currencies, TEKs profits are reduced when it converts local country revenues into U.S dollars.
To minimize currency risk, managment deals proactively with transaction, translation, and economic exposures

**Tax-Related Decisions:

TEK centralized all its European treasury functions to the firms subsidairy in England. The firm sets all the pricing for its markets worldwide at its companies headquarters.

**Currency Risk Management:

TEK has employed currency hedging selectively. As a result, TEK has experienced foreign-exchange losses in the past. Among the approaches that TEK applies are multilateral netting, offsetting cash flows, a centralized depository, forward contracts, currency options.

**Offsetting Cash Flows:

If headquarters wants to spend $1 million to establish a new subsidairyin Europe, it will direct existing European subsidairies to retain a similar amount of their earnings in Euros. Instead of converting the foreign earnings into U.S dollars, TEK uses the reatined euro earnings to build the new subsidairy.

**Forward Contracts and Currency Options:

TEK hedges against currency risk by taking positions in foreign contracts. If there is much uncertainty about the value of a future receivable, management can guarantee a fixed exchange rate and minimize currency risk.