Track: Supply Chain Management (SCM)

Abstract

When an exporter (wholesaler) sells goods at a fixed price but designated in its currency the importing retailer’s purchase price in its currency depends very much on the exchange rate between the currencies. In a floating exchange rate system ideally the purchase prices have to change continuously reflecting the movements in the exchange rate. In such a situation the entire exchange rate risk is borne by the importer. However, in such situations it is customary for the parties to enter into a risk sharing agreement. The exact terms of risk sharing depends on the relative bargaining position of the two parties to the transaction and their willingness to enter into such a risk-sharing arrangement. In a typical agreement the wholesaler may require the retailer to pay in its currency not an amount based on the actual exchange rate but on an agreed rate whenever the actual rate is in a given range. In this manner either the loss or gain due to exchange rate will be shared between both the parties. This results in a set of limited number of purchase prices for the retailer even though the selling price expressed in importee’s currency changes continuously. The stochastic variations in purchase prices are modelled through a Markov chain. This assumption  Markov chain is validated using a price sequence derived from actual exchange rate data  between UUS$ and Euro.The resulting purchase and inventory problem is analysed by identifying a regenerative cycle.