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Impact of US Dollar on SBE Profitability

The value of SBE's liquidity portfolio is determined by exchange rates as the portfolio contains currencies like CAD, NOK, AUD, EUR, GBP, and JPY. 40% of SBE's liquidity and operating capital are sensitive to exchange rate fluctuations relative to the US dollar. A weak US dollar would make US goods cheaper globally, increasing SBE's international sales and profitability by supporting higher production domestically. However, a strong US dollar would make US goods more expensive globally, reducing SBE's net exports and sales. Additionally, a weak US dollar would increase the domestic value of SBE's portfolio and stock price as it goes public in a year, while a strong US dollar would decrease the

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8 views3 pages

Impact of US Dollar on SBE Profitability

The value of SBE's liquidity portfolio is determined by exchange rates as the portfolio contains currencies like CAD, NOK, AUD, EUR, GBP, and JPY. 40% of SBE's liquidity and operating capital are sensitive to exchange rate fluctuations relative to the US dollar. A weak US dollar would make US goods cheaper globally, increasing SBE's international sales and profitability by supporting higher production domestically. However, a strong US dollar would make US goods more expensive globally, reducing SBE's net exports and sales. Additionally, a weak US dollar would increase the domestic value of SBE's portfolio and stock price as it goes public in a year, while a strong US dollar would decrease the

Uploaded by

Paul Ndeg
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The value of the SBE liquidity portfolio is largely determined by the exchange rates
of the currencies held in the portfolio. As a US based firm, the portfolio is highly diversified
consisting of: 20% CAD; 20% NOK; 20% AUD; 10% EUR; 10% GBP; 10% JPY; and 10%
other. However, only 10% of SBEs production comes from foreign production suggesting
that the repatriation of foreign production revenues creates currency exposure through the
transaction risk resulting from international trade. 40% of SBE liquidity and operating capital
are therefore sensitive to exchange rate fluctuations relative to the domestic currency, which
has several implications.
The weak US dollar relative to the variety of currencies in the portfolio implies that
US goods and services would be cheaper in the global market with SBE becoming price
competitive (Dash 45). Due to the decline in SBE prices, the international SBE sales are
expected to increase resulting in higher profitability. Declining SBE prices would also be
supported by a higher production rate in the US due to lower production resulting in growth
of 90% of its total production capacity (Rezaee 91).
The appreciation of the US dollar would result in an increase in the price of US goods
and services contingent on the fact that more foreign currencies units will be required in order
to purchase one unit of the US dollar. This would likely reduce the net exports of the US into
the international market and therefore SBE as a US exporter would have to value its good
higher in the international market resulting in a decline in its sales and profitability (Dash 49).
Consequently, domestic production in the US would me more costly compared to foreign
production resulting in growth of 10% of its total production capacity. The value of the US
dollar against the currencies therefore has a significant impact on the operating performance,
as well as the overall value of the firm (Rezaee 88).

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However, it also important to take into consideration the fact that the company wishes
to go public in a year. As an international trade firm, the U.S. dollar exchange rate has a
significant impact on the SBE overall assets contingent on its heavy international presence.
Evidently, the value of the liquidity portfolio as well as revenues and profitability are based
on the US dollar exchange rate. A weak US dollar would support higher SBE production and
also increase revenues and profits, resulting in an increase in the SBE stock price. Based on
the analysis, it is evident that the SBE stock price performance and US dollar exchange rate
fluctuations will have a negative correlation in that the SBE stock price will increase with
depreciation in the US dollar(Lee 112). Conversely, the SBE stock prices will decline with an
appreciation in the US dollar, implying that a weak US dollar would increase the domestic
value of the portfolio while a strong dollar would decrease the liquidity of the portfolio in the
next year.
Conclusion
The US dollar exchange rate in the international market has a major impact of the
value of the SBE liquidity portfolio. A weak US dollar implies that SBE sales and
profitability will increase resulting in growth of 90% of its total production capacity as well
as a higher domestic value of the portfolio along with the SBE share price. It is therefore
evident that a weak US dollar will have a significant positive impact on the company
compared to a strong US dollar.

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Works Cited
Dash, A. Prasa. Security Analysis and Portfolio Management. London: I. K., 2009. Print.
Lee, Cheng-Few. Advances in Investment Analysis and Portfolio Management. New York:
Elsevier, 2002. Print.
Rezaee, Zabihollah. Financial Institutions, Valuations, Mergers, and Acquisitions. New York:
Wiley, 2004. Print.

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