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IAI Actuarial Core Principles · Business Economics · Globalisation and multinational business

A multinational firm based in India invoices its exports to the United States in US dollars. Over the next quarter the rupee is expected to appreciate sharply against the dollar. What is the most direct effect on the firm's rupee revenue from these exports, if dollar prices stay unchanged?

Rupee revenue falls. An appreciating rupee means each dollar of export receipts converts into fewer rupees, so with dollar prices unchanged the firm's rupee income from exports declines, hurting its margins unless it hedges or raises prices.

  1. ARupee revenue falls, because each dollar converts into fewer rupeesCorrect
  2. BRupee revenue rises, because each dollar converts into more rupees
  3. CRupee revenue is unchanged, because prices are fixed in dollars
  4. DRupee revenue rises, because US demand for Indian goods increases immediately
  5. Rupee revenue is unchanged, because the exchange rate does not affect invoicing

Explanation

When the rupee appreciates, one dollar buys fewer rupees. With dollar prices unchanged, the converted rupee revenue falls. Option B reverses the direction of the effect, and option C ignores the conversion into rupees.

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