Foreign exchange impacts the profitability of transactions in international markets

Foreign exchange impacts the profitability of transactions in international markets. It can turn a profitable business into one that loses money and can turn an unprofitable business into one that makes money.

analyze the impact of foreign exchange on different business scenarios and present your findings in a short business memo.

Scenario
You manage the international business for a manufacturing company. You are responsible for the overall profitability of your business unit. Your company ships your products to Malaysia. The retail stores that buy your products there pay you in their local currency, the Malaysian ringgit (MYR). All sales for the first quarter are paid on April 1 and use the exchange rate at the close of business on April 1 or the first business day after April 1 if it falls on a Saturday or Sunday. The company has sales contracts with different vendors that determine the number of units sold well in advance. The company is contractually obligated to sell 5,000 units for exactly 1.50 million MYR for the first quarter. The break-even point for each unit is $75 in U.S. dollars. Use the following foreign exchange rates:

On January 1, the daily spot rate is 3.13 MYR, and the forward rate is 0.317 U.S. dollars per MYR for April 1 of the same year.
On April 1, the daily spot rate is 3.52 MYR.
Directions
Using the information above, create a short business memo that explains the profitability, viability, and importance of considering foreign exchange on the basis of the scenarios below.

Scenario 1: The company uses the spot rate on April 1 to convert its sales revenue in MYR to U.S. dollars.
Scenario 2: On January 1, the company uses that day’s forward rate today to lock in a foreign exchange rate for its expected 1.5 million MYR in sales. This means the company agreed to exchange 1.5 million MYR using the forward rate on January 1 when April 1 arrives.
Scenario 3: Another option for the company is to spend the foreign currency and avoid any currency exchange. Because it is a manufacturing company, raw materials are always needed.
Specifically, you must address the following rubric criteria:

Foreign Exchange Calculations: Determine the profitability of the international business by using foreign exchange calculations for the first and second scenarios.
Spend or Save: Analyze the viability of spending foreign currency to purchase raw materials as a strategy to mitigate foreign exchange risk, considering the factors that determine its feasibility and effectiveness for the company.

Factors Determining Feasibility:

Local Sourcing Needs: This is only feasible if the company has genuine, timely needs for materials or services in the foreign market. If the company's inputs are primarily sourced domestically (USD), this strategy is not useful.

Timing Mismatch: If the payment date for the MYR revenue (April 1) does not align with the vendor payment dates for raw materials, the company may still face short-term holding risk or liquidity issues.

Supply Chain Quality: The local supplier must meet the required quality and production standards, which must outweigh any potential advantages of domestic sourcing.

Recommendation: Given that the company is a manufacturing entity with perpetual raw material needs, natural hedging via spending the MYR locally is an excellent risk management strategy provided a suitable and competitive Malaysian supplier can be identified. This approach guarantees the value of the MYR revenue is preserved for operational use.

Key Takeaway for Organizational Health

This analysis clearly demonstrates that the timing and method of foreign exchange conversion are not passive bookkeeping exercises, but critical strategic decisions that directly determine profitability. The failure to hedge (Scenario 1) resulted in a $49,363 loss compared to the deliberate hedging strategy (Scenario 2). Moving forward, the international business unit should adopt a policy mandating the use of forward contracts or natural hedging for all major sales contracts to ensure financial predictability and safeguard budgeted profit margins.

Sample Answer

BUSINESS MEMO

TO: Executive Leadership FROM: International Business Manager DATE: November 21, 2025 SUBJECT: Analysis of Foreign Exchange Impact on Q1 Malaysia Sales Profitability

The following memo analyzes the profitability of the Q1 Malaysian sales contract (5,000 units sold for 1,500,000 MYR) under different foreign exchange (FX) scenarios. The break-even point for 5,000 units is $375,000 USD ($75/unit * 5,000 units). The analysis highlights the critical role of foreign exchange strategy in preserving unit profitability.

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