Managing the Volatility of Currencies and Commodities in Supply Chains (3, 2)

Question 1

What is an exchange rate? What is the mid-rate?

Answer 1

Exchange rate is the value which one countries currency can be traded for another.
Mid-Rate is the mid-point between the buying and selling price.

Question 2

Currencies are traded through foreign exchange markets. What impact does this have on the relative purchase price?

Answer 2

The higher the demand for a currency will mean a higher purchase price. This is a key influence on the purchase price.

Question 3

What key influencers are there on a currency value?

Answer 3

Government policies
Government intervention
Speculation
Inflation
Interest rates

Question 4

What are the 3 main categories of exchange rate risk?

Answer 4

Transaction risk – change in rate between date of agreement and payment
Economic risk – changes impacting a business medium to long term
Translation risk – involves gains or losses when accounting results of foreign business units translated into domestic currency

Question 5

What is a forward exchanging contract, also known as hedging?

Answer 5

It is an agreement, usually with a bank, to buy or sell a specific amount of a predetermined foreign currency on a specific future date. It enables a contract to be locked in with a future rate, for the purchase or sale of currency.

Question 6

What are 3 methods of hedging against exchange rate risks?

Answer 6

Currency futures – traded on specialist futures exchanges, it is an obligation for the purchase or sale of a specified amount of a predetermined currency
Currency options – for a premium, the currency option provides a right (not obligation) to buy/sell a specific amount of currency at a specified exchange rate
Currency swaps – an agreement to swap equivalent amounts of different currencies

Question 7

What is a currency bank account?

Answer 7

For times where an organisation has a two-way flow of currency (e.g. for receivables and payables), they might use a currency bank account. This avoids the need to always exchange currencies into the organisations domestic currency.

Question 8

How can commodities be categorised?

Answer 8

Hard commodities – these are natural resources extracted through mining.
Soft commodities – these are natural resources which are grown

Question 9

What is a speculator?

Answer 9

Buys commodities at an agreed future price in the expectation that, by then, the price will have increased and it can be sold immediately at a profit.

Question 10

What do the following key terms mean in relation to future and options contracts… Call, Put, Margin, Contract for difference?

Answer 10

Call – the right to buy against agreed terms
Put – the right to sell against agreed terms
Margin – the parties must both place an amount of cash with the exchange
CFD – an agreement to exchange the amount which the commodity has changed in value over an agreed time