Question

In: Accounting

Stardust, Inc. is an exporter of plumbing fixtures. About 30 percent of its sales are made...

Stardust, Inc. is an exporter of plumbing fixtures. About 30 percent of its sales are made in Canada. The sales department just found out that the Canadian dollar is at a premium against the U.S. dollar based on the 90-day forward rate, while the 180-day forward rate indicates that the Canadian dollar is at a forward discount. What is the likely impact of these rates on the company’s sales to Canada?

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Expert Solution

Forward premium it is an situation in which the forward or espected price for a currency is greater than the spot price. This shows that current domestic exchange rate is going to increase against the other currency.

It is true to say that in the foreign sales one must keep a close look upon the matter because it is rate which gives profit or loss to the firm. so, it is advisible to keep track of the foreign exchange rate and changes in the near future as this has an impact on the sale, growth, and future planning for the company.

Impact during Forward Premium

Forward premium is the difference between the current spot rate and the forward rate. Basically, forward premium reflects possible changes arising from the difference in the interest rate between the two countries and the two currencies which are involved in that trade trancations.

If canadian dollar is at premium than it is not benefit for the US firm to sell their product in the canadian market as US seller receives lesser payments during conversion of exchange rate as it is forward premium.

This shows value of canadian dollar is stronger during forward premium during next 90 days and the firm of US received lesser payment durinh that periods so it is not advisible to trade.

Impact during Forward Discount

On the other hand, if Forward discount than in the nexrt 180 days it is advisible to trade betweeen two countries as canadian dollar during that days are considered week compared to US dollar as exchange rate is stronger in respect to US dollar.

Forward Discount is that situation in which expected future price of a currency is below than the spot price, which shows future decline in the currency price . in this situation US dollar become stronger and more profit to the canadian company and earn more and more profit in the next 180 days.

So, it is advisiable to trade more by the US firm during Forward dicount of canadian dollar as they earn more while during forward premium of canadian dollar US firm have no benefit to trade as they suffer less revenue during yhis period.

ekkarill92 answered 2 years ago
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