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Economics of exchange rates - Essay Example

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Economics of exchange rates

Operating under such a business scenario is too risky for any business. This is because, regardless of how much sales a business makes, and regardless of how much a business tries to minimize its costs and expenditures, it will always find itself on the receiving end, where its performance is not dependent on its efficiency or effectiveness but rather on the behavior of the foreign exchange markets (Sarno & Taylor, 2005, p. 83). XJP receives virtually all its supplies directly from J&J Ltd, which, in turn, invoices all the costs and expenditures in Euros. On the contrary, XJP makes its sales in Chinese Renminbi. Therefore, it has to convert the income made from the sales from the Chinese currency into the Euros so that it can submit its payment to J&J Ltd. This means that the amount XJP pays to J&J is not solely dependent on the value of the supplies it receives from this company, but also on the rate at which the Chinese currency exchanges for the Euro. ...Show more

Summary

The trends for the foreign exchange indicate that XJP lost 60 million Renminbi in 2003 and other 70 million in 2004 (Moffett, Stonehill & Eiteman, 2008, p. 253). Foreign exchange gains and losses have a significant impact for XJP’s corporate performance, since it fully depends on how the foreign currencies behave towards each other to make its profits or suffer losses…
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