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IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates

An Indian software exporter invoices its US clients in US dollars and incurs most of its costs in rupees. If the rupee depreciates against the dollar and nothing else changes, what is the most likely immediate effect on the firm?

The exporter's rupee revenue rises because each dollar converts into more rupees, while its rupee costs stay the same. Rupee profit margins therefore tend to widen, assuming prices and volumes are unchanged and the dollar invoice amount is fixed.

  1. AIts rupee revenue rises while its rupee costs are unchanged, so rupee profit margins tend to widenCorrect
  2. BIts rupee revenue falls while its rupee costs are unchanged, so margins narrow
  3. CIts rupee revenue and rupee costs both rise in the same proportion
  4. DIts dollar revenue falls because each dollar buys fewer rupees
  5. Its rupee costs rise because the exporter must buy dollars to pay staff

Explanation

Dollar receipts convert into more rupees after a depreciation. Costs are in rupees and do not change, so margins widen. The dollar invoice amount is fixed, so dollar revenue does not fall, and rupee costs are not affected.

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