International Business Transactions Have Many Elements...

Introduction Those organizations wishing to engage in international business transactions have many elements they must consider. One of these elements is that of foreign exchange rates, the rate at which one currency can be converted into another (Hill, 2014, p. 296). While a company may be located in the United States, they may engage in commerce with organizations in foreign markets that require payment in their domestic currencies. Organizations must pay careful attention to these exchange rates, as their fluctuations can significantly impact the costs of doing international business, as demonstrated in the first section. While exchange rates are determined by the supply and demand of currencies on the foreign exchange market†¦show more content†¦Identify the spot and forward exchange rates between the two currencies. What factors influence your decision to use each? Which one would you choose? How many dollars must you spend to acquire the amount of yen required? This or ganization wishes to limit its transaction exposure when paying its Japanese supplier in six months. This exposure reflects how the cost of this transaction is affected by foreign exchange price fluctuations (p. 313). Because the exchange rate is expected to fluctuate during this period, the  ¥1,000,000 will payment will cost the organization differing amounts depending on which exchange rate is used for the conversion of the domestic currency into the Japanese Yen, which will impact the organizations profit margins. There are two options for this conversion, the spot exchange rate and the forward exchange rate. The spot exchange rate is the currency conversion rate on a specific date (p. 298). As of May 28, 2016, the spot exchange rate for the conversion of U.S. dollars into Japanese yen is $1= ¥110.36 (USD/JPY - US Dollar Japanese Yen , n.d.). If the organization chose to convert its domestic currency into Yen on this date, the organization would be required exchange $9,061.26 (rounded up) to fulfill the  ¥1,000,000 requirement. An alternative to this rate is the forward exchange rate. This rate is the currency exchange rate governing transactions that occur in the