IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses
An Indian software exporter invoices its US clients in US dollars and incurs most of its costs in rupees. The rupee depreciates sharply against the dollar. Other things equal, what is the most likely immediate effect on the firm?
Rupee revenue rises while rupee costs stay the same, so margins improve. Depreciation means each dollar earned converts into more rupees, and because the firm's costs are already in rupees, the extra conversion value flows directly into profit.
- AIts rupee revenue rises while its rupee costs are unchanged, so rupee profit margins improveCorrect
- BIts rupee revenue falls because each dollar buys fewer rupees
- CIts rupee costs rise in line with the depreciation, leaving margins unchanged
- DIts dollar revenue falls because foreign customers must pay more
- Its competitiveness against foreign rivals worsens because its prices in dollars must rise
Explanation
A depreciating rupee means each dollar of revenue converts into more rupees. Costs are in rupees and do not change, so rupee margins widen. The option claiming revenue falls has the direction of the exchange rate effect reversed.
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