Monday, May 5, 2014

Short currency exchange rate lesson: Kia Motors and the Won

The trading of  goods and/or services internationally requires the exchanging of currencies to facilitate those transactions.  Consumers and producers are at the mercy of the prevailing exchange rates their currency has relative to another currency.

Any change in that exchange rate can have an impact on trade and the profits realized from that trade:

Kia Motor Profit Rises on High-End Sales Despite Challenge of Strong Won

Exports of Kia's key models, including the Sportage sport-utility vehicle and the Soul wagon, rose 13% in the first quarter from a year earlier, contributing to a 7% increase in average export prices for the period, the company said. 
Still, the company warned that the appreciating won could hurt earnings in the coming quarters. 
"The won is maintaining its upward trend, while competition is intensifying with aggressive marketing activities by rival auto makers and a series of new launches," said Kia Chief Financial Officer Park Han-woo. 
The won in 2013 reversed several years of weakness and has been on a steady rise against major currencies. It gained 1.5% against the U.S. dollar in the first quarter from a year earlier, and recently traded near a six-year high.
Korean Won is trading at 1030.14 Won (W) per US Dollar today.  This means the holder of $1.00 US who wishes to exchange it into Korean Won would receive 1030.14(W) for it.

If tomorrow $1.00 purchases 1020.14(W) then the purchasing power of the dollar has decreased ( I can buy 10 FEWER Won today than I could yesterday). This means that items in Korea price in Won will become MORE expensive for me to purchase--I have to now give up more than $1.00 to buy the same amount of Won as I purchased yesterday. With rounding that would be $1.01 US. It is only a penny but with BIG money a 1% difference adds up.

It can be said the Dollar has DEPRECIATED in value and the Won has APPRECIATED in value.

Kia can be hurt in 2 ways with an Appreciating currency.

(1) it makes a Kia produced in Korea MORE expensive for holders of dollars to purchase, as in the example above.  NOTHING regarding the vehicle made it more expensive ONLY the change in exchange rates between the two currencies did so.

Using the 1% example above, a Kia priced at $30,000 US would now cost $30,300 US ($30,000 X $1.01).

(2) any profits Kia earns in US dollars will now buy FEWER Won than it did before the Depreciation of the US dollar, so in profits in Won will be less than they other would have been.

Using the 1% again, profits of, say, $500 million dollars would be effectively reduced to $490.128 million ($1.00/1020.14 X $500M).

Bottom line: Exchange rates are another thing businesses have to account for in the course of doing trade across borders.

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