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Simulation/Optimization Experiments

In: Forecasting and Hedging in the Foreign Exchange Markets

Author

Listed:
  • Christian Ullrich

    (BMW AG)

Abstract

A situation is presented, where a manufacturing company, located in Eurozone, sells its goods via foreign subsidiaries to the end-customer in the United States. Generally, a strong foreign currency (weak EUR) is considered to be beneficial for the company because of a larger purchasing power for the customer abroad. Since one unit of foreign currency is worth more units of home currency, Eurozone manufactured goods - if prices remain constant - are cheaper which in theory has a positive effect on international sales. Foreign exchange risk arises at the United States subsidiary, which on the 15th of every month needs to exchange its USD turnover into EUR in order to meet its liabilities with the Eurozone parent company. Since it is not clear what the spot exchange rates for the given currencies will be on the future transaction dates, the subsidiary is exposed to foreign exchange transaction risk. In this case, risk consists in an appreciating EUR against foreign currency. For the US subsidiary, a stronger EUR is associated with higher cost of goods and a lower turnover at period end as a consequence.

Suggested Citation

  • Christian Ullrich, 2009. "Simulation/Optimization Experiments," Lecture Notes in Economics and Mathematical Systems, in: Forecasting and Hedging in the Foreign Exchange Markets, chapter 15, pages 163-179, Springer.
    • Handle: RePEc:spr:lnechp:978-3-642-00495-7_15
    DOI: 10.1007/978-3-642-00495-7_15
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