IF USDMYR and CPO Prices are negatively correlated. That would mean that if CPO goes up, USDMYR would go down. Which would hurt the company since its revenues in MYR terms will go down as its operating costs go up. SO he should hedge. The question asked about one reason why he should not hedge? isnt that wrong?
natural hedge. oil prices go up -sales(exports) decrease but made up depreciating home currency. oil prices go down,sales increase,but profit dampened by appreciating currency.
they were talking about CPO prices going up, which is a raw material for them and forms the bulk of their purchases. They didnt mention the prices of refined oil goes up. So if the CPO prices go up, its a double whammy as the operating costs go up and the reveues go down.
is this a different version of the exam?
He should not hedge. Oil prices go up is a negative for firm because supply cost go up. USD/MYR go down, this is positive for the company. USD will buy more MYR when they convert it back. The positive helps cancel out the negative. If they hedge the currency then they wouldnt have the positive.
cfasing123 Wrote: ------------------------------------------------------- > they were talking about CPO prices going up, which > is a raw material for them and forms the bulk of > their purchases. They didnt mention the prices of > refined oil goes up. > > So if the CPO prices go up, its a double whammy as > the operating costs go up and the reveues go down. Your misunderstanding is that revenue in MYR terms goes down. It goes up. USD/MYR goes down means that each USD can buy more MYR, so their revenue in MYR goes up.
USDMYR is quoted as MYR per 1.00 USD. So if USDMYR goes down, say from 3.50 to 3.00, that means each USD gets you 3.00 MYR instead of 3.50 MYR. so the revenue in MYR goes down.
for market data yes. USDMYR means MYR per USD. CFAI curriculum USD/MYR means USD per MYR. Its opposite. Anyway, thats the only way the question makes sense.
thanks a lot.