The paper "Movements in Exchange Rate and Impact on Economic Value of Rio Tinto Group" is a wonderful example of a case study on macro and microeconomics. Rio Tinto Group is an international company that operates in multiple markets using different business and operating structures and like any other multinational enterprise, the Group’ s operations in the international markets are exposed to exchange rate risks. These risks arise from unfavorable changes in the value of currencies of countries where the company has stakes and business against the value of home currency i. e.
Australian Dollar. These risks have a significant effect on the company’ s value of assets, liabilities, and cash flows. The seriousness of the issue of foreign currency risk facing the companies can be estimated from the data that the RBA has published indicating that during the period from 2010 to 2013 the there has been fluctuation between USD and AUD. This has resulted in a negative effect on Rio Tinto Group profits resulting from the unfavorable changes in the cross-currency exchange rates. To understand the severity of the impact of currency fluctuations on the company’ s business is the case of Rio Tinto Group's interests in the international market which are badly affected. Movements in the exchange rate of AUD vs USD The graph below shows the exchange rates for the Australian Dollar (AUD) against USD.
The movements indicate that the Australian dollar lost ground against the US dollar since the year 2010 to the year 2013. Although there is a fluctuation between the periods the general trend is the upward trend. In the years 2011/2012, the exchange rate ranged between 1.0308 to1.1052 (Reserve Bank of Australia, 2003). The Effect of changes in the exchange rate on the amount paid between the contract and settlement dates The amount of the contract is USD100,000 on February 1, 2013, and the settlement is on August 1, 2013.
The exchange rate on February 1, 2013 is AUD 1 = USD 1.0468 and on August 1 2013 AUD1 = USD 0.8969. The exchange rate at on February 1, 2013, is 1.0468 and USD 100,000 will be equivalent to = AUD 99,246.39
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