In early 2016, the same Germany machinery company has interest from four prospective clients from emerging markets: Indonesia, Brazil, Russia, and South Africa. They all want to buy ten machines, but the factory can only produce ten in time. Therefore, the company has to choose only one client. Given the volatility of the domestic currencies of the four prospective clients, the CFO would like to choose the client which is least likely to cancel the order due to currency volatility. The invoice comes due on June 30, 2016. According to volatility alone, which prospective client would be most likely to cancel the order?

According to the picture below, Brazilian real is the currency that has the lowers currency volatility, its spot is 4.0685, and its forward is 4.1820. These values are way lower than the values of the other three currencies, and for this reason, the CFO should choose the Brazilian client, clearly.

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ogorwyne ogorwyne · Answer 2 · 2021-12-02T17:11:23+01:00

Indonesia is the country that is most likely to cancel this order. This is due to its high volatility.

Following the volatility chart that is attached to this question we can clearly spot that Indonesia has the most likelihood to cancel the order.

The volatility of the currency of the country Indonesia is shown to be high and this high volatility is very much going to have an impact on trade.

When there is a weakness in the currency of a nation, the cost of import would go up.

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