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

An Indian software exporter invoices its US clients in US dollars and incurs most of its costs in rupees. The rupee depreciates against the dollar from ₹80 to ₹84 per dollar. Assuming dollar prices and volumes are unchanged, what is the effect on the rupee revenue from a contract worth $500,000?

Rupee revenue rises by ₹2,000,000, from ₹40,000,000 to ₹42,000,000. The $500,000 contract converts at ₹84 instead of ₹80 per dollar, so each dollar earns ₹4 more, while rupee costs stay the same, improving the exporter's margin.

  1. ARevenue falls by ₹2,000,000 to ₹40,000,000
  2. BRevenue rises by ₹2,000,000 to ₹42,000,000Correct
  3. CRevenue rises by ₹4,000,000 to ₹44,000,000
  4. DRevenue rises by ₹500,000 to ₹40,500,000
  5. Revenue is unchanged because the contract is in dollars

Explanation

At ₹80, revenue = 500,000 × 80 = ₹40,000,000. At ₹84, revenue = 500,000 × 84 = ₹42,000,000. The increase is ₹2,000,000. Saying revenue is unchanged ignores that the firm reports in rupees.

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