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

An Indian software exporter finds its costs are mostly in rupees while its revenue is in US dollars. Other things equal, which effect of globalisation-related exchange rate movement will hurt its rupee profits?

Appreciation of the rupee against the dollar hurts the exporter because dollar revenue converts into fewer rupees while its costs remain in rupees. Depreciation, higher demand, lower wages or higher dollar prices would all help or leave profits unaffected.

  1. AAppreciation of the rupee against the dollarCorrect
  2. BDepreciation of the rupee against the dollar
  3. CRise in foreign demand for Indian services at fixed prices
  4. DFall in domestic wage costs
  5. Increase in dollar-denominated prices charged to clients

Explanation

When the rupee appreciates, each dollar of revenue converts into fewer rupees while rupee costs stay unchanged, so margins fall. Depreciation has the opposite effect, and the other options either raise revenue or reduce costs.

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