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Benefiting from globalisation; Wildflowers Ltd Wildflowers Ltd can either sell wildflowers in NSW for a profit of A$100,000 on total sales of A$1 million, or in Japan for the same profit of A$100,000 on sales of Yen 68 million - or A$ 1 million at today's exchange rate of A$1.00 = Yen 68.00. The company therefore knows that if the exchange rate falls to Yen 65.00 then their revenue in Japan goes up to 68 million / 0.65 = A$1,046,153 and profits by A$44,153 to A$146,153. To increase profits by 46% Wildflowers can either wait until the exchange rate reaches A$1.00 to Yen 65.00 or sell the wildflowers today for delivery in one year - for, as it happens, the one year 'forward foreign exchange rate' or 'outright rate' for the Yen is currently at A$1.00 = Yen 65.00. And there's no GST on exports. |