Exchange Rate Fluctuation

Tesla uses the dollar current spot rate ($ 4.2) as a forecast for all future periods of concern. As the exchange rate
will typically fluctuate over time the company does not know whether the dollar will strengthen or weaken in
the future. Though the difficulty in accurately forecasting exchange rates is well known, a multinational capital
budgeting analysis could at least incorporate other scenarios for exchange rate movements, such as a pessimistic
scenario and an optimistic scenario. According to the parent’s point of view, appreciation of the Spanish euro
would be favourable if the dollar inflows would be converted to more U.S. dollars. Contrariwise, depreciation
would be unfavourable since the weakened Euro would convert to fewer U.S. dollars over time.

Cash flow received by the parent differs depending on the scenario. Thus, the feasibility of the project is
depending on the probability distribution of these scenarios for the dollar during the project lifetime. If there is a
high probability that the weak currency will occur the project should not be accepted.

Hedge Exchange Rate

An international investment will create exposure to currency volatility, especially around big events. So, we’ve
taken a look at some considerations for hedging foreign exchange exposure.

The foreign exchange market includes all the different transactions of currency exchange. It consists of selling
domestic currency to buy foreign money at a certain value or rate, usually defined by supply and demand.

Eventually, movements in the exchange rate are a risk for investors and businesses with international operations.
Therefore, they adopt strategies to minimize the impact of eventual adverse movements. This is known
as hedging, and it involves using financial instruments to increase protection against currency fluctuations.
Hedging makes transactions, cash flows, and cost structures more stable and predictable. The different tools for
hedging against foreign exchange risk usually involve contracts for exchanging currency at a fixed rate at some
point in the future.

Forward Contracts

Forward contracts, or forwards, specify an amount, exchange rate, and date for a currency exchange between
two parties. Forwards allow parties to close deals and plan at current rates. They have practically no cost;
however, there is always the risk of one party failing to comply.

Imagine a Chinese company is selling computers to an American buyer and will ship monthly for a year. They
sign a forward stating that the buyer will pay at the end of the year at today's exchange rate. If the exchange rate
changes, the contract guarantees that the buyer will still spend the same amount of dollars and the company will
still receive the same amount of yean.

Futures Contracts
 Futures contracts, or futures, are financial instruments with conditions for a currency exchange, including the
amount, rate, and expiry date. They are available in the market and can be traded like other financial assets.
Futures eliminate the non-compliance risk of forwards, so they are common when there are credit risks.
However, futures are not customized and are usually available only in major currencies.

By selling futures, investors might hedge devaluations. By buying futures, the hedge appreciates. For example, a
U.S. company will receive 25 million British pounds in three months, so the company sells futures for delivery
in 90 days. If the pound depreciates against the dollar, the expected amount is protected. However, if the pound
appreciates, the company won't make any profit from the favourable exchange rate.

YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Net Remittance 95,760,000 118,455,804 143,533,419.12 170,796,722.04 200,402,040.96
(IN MYR)
Forward rate (In 4.2 4.2 4.2 4.2 4.2
Ringgit)
Net Remittance 22,800,000 28,203,762.86 34,174,623.60 40,665,886.20 47,714,771.66
(In USD$)
Present value of 19,826,086.96 24,525,011.18 25,840,925.22 26,738,467.13 27,281,075.56
Remittance
Initial Investment
by 50,000,000
Parent company
-30,173,913.04 -5,648,901.86 20,192,023.36 46,930,490.49 74,211,566.05
Cumulative(NPV
)

Here we have determined the Forecasted exchange rate from the following source:
https://walletinvestor.com/forex-forecast/usd-inr-prediction

  YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Net Remittance (IN
MYR) 95,760,000 118,455,804 143,533,419 170,796,722 200,402,041
Forward rate (In
Ringgit) 4.33 4.33 4.33 4.33 4.33
Net Remittance (In 27356998.6 39444970.4
USD$) 22115473.44 1 33148595.64 5 46282226.55
Present value of 22404945.5 26457117.3
Remittance 20014003.11 3 24568480.65 1 28093306.26

Initial Investment by
Parent company 50,000,000
Cumulative(NPV) -29,985,997 -7,581,051 16,987,429 43,444,547 71,537,853
 NPV after 6 years without Forward Hedge 74,211,566.05
NPV after 6 years with Forward Hedge 71,537,853
Difference after Hedge 2,673,713.19

So the net present value is 2,673,713.19 which means the net present value is positive in terms. So we can say
that Hedging is successful.

Tesla will be hedging some of the expected cash flows of the new project in Malaysia. In this Case,
we would evaluate the project based on hedged exchange rates applied to the expected cash flows
that are to be hedged.

Expected future spot rate is ringgit 4.2 per USD $ for all 6 years. With forward hedge our NPV is
$71,537,853. Without using this forward rate Our NPV would have been $74,211,566.05 which is $
2,673,713.19 more than our actual NPV of $74,211,566.05