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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

An Indian software company invoices its US clients in US dollars but pays nearly all its costs in rupees. If the rupee appreciates against the dollar, what is the most likely immediate effect on the company?

Rupee appreciation means each dollar earned converts into fewer rupees, while costs stay in rupees, so the exporter's rupee revenue and margin fall. Costs do not fall automatically and dollar prices are not adjusted by the exchange rate itself.

  1. ARupee revenue per dollar invoiced falls, squeezing profit marginsCorrect
  2. BRupee revenue per dollar invoiced rises, increasing margins
  3. CDollar prices charged to clients must rise automatically
  4. DRupee costs fall in proportion to the appreciation
  5. There is no effect because both revenues and costs are domestic

Explanation

Dollar receipts convert into fewer rupees after appreciation, while rupee costs are unchanged. Margins therefore fall. Dollar prices are contractual and do not change automatically, and rupee costs do not adjust with the exchange rate.

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