Vanguard Security Corporation Case, International Transaction Dilemma

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Vanguard Security Corporation Case, International Transaction Dilemma 1. What are the risks or exposures faced by VSC? Vanguard Security Corporation is planning to receive $127.27 million six months from now. However, as the home currency for the corporation is Euro; therefore, the accounts receivable amount is susceptible to changes in the exchange rate. Whenever an international company deals with customers that are outside the domains of their home country, the risk of ‘exchange rate fluctuation’ is always the prime concern. In the case of VSC, as the customer contract specifies the amount in dollars; hence, the company is at a risk of exposing its receivables to euro-dollar exchange rate. However, to gauge the factors that affect the risk and exposure to exchange rate, there is needed to get a full picture of the determinants of exchange rate. First of all, the relative interest rates of two countries are crucial in establishing the currency value. Secondly, the prevalent inflation rates also affect the nominal interest rates; hence, they also play a key role in determining the currency appreciation or depreciation percentage. Finally, on a broader perspective, any nation’s current and financial account balances also affect the exchange rate. For this reason, the above mentioned four factors are decisive in marking the level of exposure to currency exchange rate fluctuation. 2. Forecast the exchange rate for the contract period using the four techniques (Interest Rate Parity, Purchasing Power Parity, and International Fischer Effect & Balance of Payments). Interest Rate Parity: The ‘interest rate parity’ theory suggests that the future spot exchange rate between two currencies will be a function of the prevalent interest rate between them. Therefore, according to IRP theory, the decisive factors of future exchange rate are the interest rates
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