Free Online Course in International Business

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Summary

Knowledge Statement

Knowledge of Foreign Exchange Risk Mitigation Techniques and Required Documentation: Hedging Tools, Currency Option Contracts, Transfer Pricing

Activities

Trade Negotiation Exercise

The purpose of the exercise is to provide an opportunity to use exchange rates and barter for a product. 

Task 1

Divide the students into groups. If possible each group should consist of 3-5 members (preferably 5 and no fewer than 3).  Each group is given USD500,000.00.  With this money they will buy from the list of products that are provided.  Each product will be sold in a different currency.  Once they have made their selections, they are provided with exchange rates to purchase their products.  The exercise can be done in one session or over several sessions, but each task should be separated by one-week intervals to accommodate the use of forward rates.  The students are also given one-week forward rates.  They can choose to purchase at the spot rate or the forward rate.  This exercise will provide them with the experience of doing conversions with actual market rates and evaluating various alternatives.

Task 2

Inform the students that they must swap out their currency for one more week because they are allowed to defer payment.  Each group will be assigned a group number and asked to put on the board the products that they purchased so that the entire class knows what they own.  Each group is given an advantage exclusive to their group only and instructed to barter from the other groups for the advantage product that they want to own.  The students should be instructed not to share their advantage with any other group.  This exercise will help them understand the use of swaps and bartering for goods.

Task 3

Have the groups complete their swaps and pay for their goods.  The students will be instructed to sell all of their products as listed in their group advantage sheets from week 2.  They must sell their goods in the currency in which they purchased the goods.  Once they have completed this process, they will convert the foreign currency back to the US dollars and close their books to determine any profit or loss from the original $500,000.00.