2) Guney Ltd is a Turkish textile company and sells its products in Portugal in Euros...

2) Guney Ltd is a Turkish textile company and sells its products in Portugal in Euros from Turkey. Most of Guney’s costs are in TL.

i) Is Guney exposed to transaction risk? Why? Why not? (5 points)

ii) Is Guney exposed to economic risk? Why? Why not? (5 points)

iii) Is Guney exposed to translation risk? Why? Why not? (5 points)

iv) Guney pays 10% additional export tax to sell in Portugal but its prices are still competitive compared to companies in Portugal thanks to low labor and raw material costs in Turkey. Now Guney mngt is considering selling products in Turkey as well. Do you think this is a good idea? (5 points)

Expert Solution

As Guney Ltd is a Turkish textile company, dealing in currency Lira and sells its product in Portugal in Euros, so there is a problem of exchange rate fluctuations.

1) Guney is exposed to transaction risk as a result of the adverse effect caused due to foreign exchange rate fluctuations on the completed transactions.

2) Economic risk is due to changes in the economic conditions of the foreign country. Guney is exposed to economic risk as it deals completely with Portugal and the economic condition of Portugal affects its business.

3) Guney is not exposed to translation risk as the company's assets, liabilities and equities are in home country and does not face any change in value due to change in exchange rates.

4) It is a good idea of Guney mngt to sell products in Turkey as well. This is because, while selling in Turket, the company can escape paying the 10% additional export tax which is imposed while selling the commodity in Portugal and can be saved while selling the commodity in home country.

Rahul Sunny answered 2 years ago

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