FIN480: International

Financial Management
Section: 2
Faculty: Mohammad Fahad
Noor
CASE STUDY ASSIGNMENT: 1

Group Members:
Md. Nasrath Faisal 1210914
Farzana Rahman 1230321
Anika Tahsin Raisa 1110086

Nusrat Jahan - 1130225

Sarker Tawfique Ahmed 1220445

How would our living standards be if we still have had 1972s exchange
rate of one US dollar equivalent to 7.28 BDT?
If our BDT exchange rate was deflated and highly valued as that
of 1972, while all other exchange rates inflated and varied
against the rate of the USD, then Bangladesh wouldnt be
developing at the rate that it is today. This is because exports
would slow down and that would hamper the GDP growth of
Bangladesh, hence affecting living standards. Foreign countries
would invest in other nations where they would get more local
currency per dollar invested, thus providing greater returns for
the investors of FDI. The government of BD intentionally keeps
the value of the BDT inflated, so as to encourage more FDI and
exports for the growth of the nation.

Case Study: 1

Explain how currency appreciation affects the exporters?

Currency appreciation affects the exporters negatively. This is
because, the price of exported goods is denoted in foreign
currency, such as the USD. When the local currency value
appreciates, considering that export prices are fixed in the
contract with the investors, the exporters would recieve a lower
amount of local currency when converting the foreig currency to
their local currency, thus leading to losses after paying for the
manufacturing expenses (labor costs and other operational bills).
Exporters are unable to raise their prices in such situations, as
global competition is so strong, that the investors could simply
take their business elsewhere to neighboring countries if the
exporters were to raise the prices to adjust to the local currency
deflation.

Why do you think exporters should diversify not only products bot also
their export destinations?
Exporters should not only diversify products, but also their export
destinations to minimize risks related to exchange rate
fluctuations. For example: a Bangladeshi exporter, exports goods
or services to USA and UK. If the value of the USD depreciates as
opposed to the BDT, then the USD to BDT exchange rate falls as
well, which would lead to losses for the exporter and less
business from USA to BD as price adjustment to match new
exchange rates would make it more costly for the US importers to
purchase goods from Bangladesh. Therefore in such situations,
the exporter can minimize losses by covering it with business
from UK, considering GBP to BDT rates remain in favor of the
local exporter; while holding business with the US (at a loss), as
earning the trust and business of foreign buyers is a very difficult

and competitive task.

What should be the short term, mid-term and long term strategy Veltex
should follow to minimize the negative impact on their export revenue?
Short term strategy: In order to reduce the risk of future losses
due to exchange rate fluctuations, Veltex should get into a
forward agreement with any bank or currency exchange
institution, and lock down a fixed exchange rate for the GBP in
terms of BDT, whether the rate goes up or down. This form of
hedging will minimize risks for Veltex.
Mid- term strategy: As India can steal Veltexs business if the
price is increased to anything equal to or above 6, the mid-term
strategy to minimize losses would be to increase the price as
close as possible to 6, such as 5.9 per tshirt. Although this will
not eliminate losses, it will minimize the amount lost up to a
certain extent, of still being able to hold on to the business rather
than losing it to India.
Long term strategy: If the depreciating fluctuations of the GBP
against the BDT become a usual norm; then consistently hedging
for such large volume of exports may not be profit efficient, due

to the premium fees attached to hedging. Thus in the long run, it

would be in the best interest of Veltex to diversify the 25%
volume of garments exported to UK, to various other countries.
So as a result of diversifying exports to various nations, Veltex
minimizes the risk of exchange rate fluctuations.
What action plan should Bangladesh Bank adopt to minimize the
impact?
When conducting international trade, a letter of credit (LC)
agreement is provided by a bank, as a form of payment gurantee
for a line of credit. Bangladesh Bank should adopt a policy such
that, that exchange rates of the foreign currency against the BDT
are locked at the spot rate during the signing of the trade
agreement. This will gurantee that, when the payment for the
trade is made, the foreign currency is converted to BDT at the
previously agreed upon rate, regardless of exchange rates in the
open market. This would be similar to hedging, except without
the premiums, and it would be a mandatory clause in the
agreements or LC. If this policy could be adopted, then it would
minimize the chances of any losses, but it wouldalso constrict
possible potential gains for the exporters, if the exchange rate
were to go up (BDT inflated).

Case Study: 2

Why would Russians or foreigners in other countries be willing to pay a

premium for dollars, over the official exchange rate?
Foreigners would be willing to pay a premium for dollars from the
black market, over the official exchange rate because, as the
nature of a black market- its activities are in the shadows, and
away from government supervision. As such, people from
developing countries, where parallel or black markets for forex
exist, sometimes prefer to pay a premium and purchase dollars

from the black market, over the official exchange rate. This
benefits them in ways such asi. Purchasing foreign exchange in quantities over their official
quota per head. For example: in Bangladesh, a person is
not allowed to purchase and take abroad more than
$10,000 per year, but due to the existance of black
markets in forex, they are able to slip by this restrictive
ii.

policy.
Avoid taxes which could have been imposed on the source

of funds used to purchase the foreign currency etc.

What does it tell you if there is an existance of black market in forex?
Majority of developing nations are restricted in the domestic
transactions of foreign exchange. Parallel markets or black
markets for forex usually develop in conditions of excess demand
for foreign exchange, subject to legal restrictions on sale and
official price ceilings. Typically, the exchange rate is pegged by
the central bank, and only a small group of intermediaries is
permitted to engage in currency transactions. Purchases of
foreign exchange by domestic agents are restricted to uses
judged by the authorities at the Bangladesh Bank, to be
essential for economic development. As a result, some of the
supply of foreign exchange is diverted and sold illegally in the
market at a higher rate than the official rate. This unofficial rate

is known as the parallel-market premium.

Should we manage the valuation of our currency or let the market
decide the real price of our currency?
Our currency, as a developing nation is pegged (artificially fixed)
at a certain exchange rate, so as to encourage Foreign Direct
Investment (FDI) and increase exports. We should manage the
valuation of our currency instead of letting the market decide the
real price. This is because, if we were to let the market forces
allign the exchange rates, the black market dealers could fully
utilize their stocks of foreign exchange, and if it turned out to be
inflating the BDT opposed to the USD, it would lead to an excess
of imports due to there being too much money available in the

hands of the consumers; on the other hand if the BDT deflated

opposed to the USD, then if would discourage foreign investors,
as labor costs and manufacturing costs for FDI in Bangladesh
would rise, hence the net exports of the country would drop. Thus
up to a certain extent, we should manage the valuation of our

currency as a developing nation.

How does parallel market guide the Bangladesh Bank in managing the
valuation of BDT?
The parallel market always sets forex rates at a certain premium
over the authorized official rate, set by the Bangladesh Bank. As
demand is so great in these black markets, currency exchange
rates vary day to day, which helps the central bank to adjust
their rates accordingly. If Bangladesh Bank wanted to eliminate
the existance of these parallel markets in forex, they could
simply raise the exchange rates as marginally close as possible
to the black market rates, thus leading to black market dealers
either raising their prices, which is risky, or quitting the business

if they are small time business men.

Write down the pros and cons of restrictions in forex trading in
Bangladesh.
Pros:
i. Transparency- Due to the regulated nature of a restricted
forex market, trades are absolutely transparent, as
opposed to the lack of transparency in the black markets
ii.

trading.
The forex market is fast and volatile- One of the
advantages of restriction in forex trading is that it is fast
and volatile, which means that you can make money fast,
the downside is that you can lose money just as fast as
well. Currency values can change without warning, making

iii.

it difficult to accurately predict where to invest your money.

Leverage can work against you- Although good leverage
can help you make bigger investments with smaller capital,
it can also lead to losses that are greater than what you

initially invested. Just as you can make $100 for every $1 of

capital, you can also lose that same amount.
Cons:
i. Leverage- Foreign exchange markets give investors a lot of
leverage when trading. Some markets allow a leverage
ratio of up to 50:1 or 100:1. This means that you can earn a
lot of money with a relatively small investment.
Unfortunately, with restrictions in forex trading, investors
ii.

cannot take advantage of this facility.

Round the clock trading- Unlike normal securities markets,
forex markets are open 24 hours a day, 5 days a week. This
means that we can trade at any time of the day or night

iii.

according to our liking.

Losing out on low cost trading due to restrictions- There are
no commissions, most forex brokers make profits from the
spreads between forex currencies. Hence, one does not
have to worry about including separate brokerage charges.