A group has operations in India and the UAE and reports in US dollars. How would you handle currency in budgeting and forecasting?

Question

RED SAG · Accepted Answer

I would have each business forecast in its own currency, rupees for India and dirhams for the UAE, because that is how managers run their operations. Then I would translate to dollars at fixed budget rates agreed at the start of the year. When reporting actuals, I would show results at both actual rates and budget rates, so I can split performance into a constant-currency operating variance and an FX translation variance. That stops managers being blamed or praised for currency moves. I would note that the dirham is pegged to the dollar, so most of the translation risk comes from the rupee, which floats. Separately I would look at transaction exposure, such as Indian entities buying imports in dollars, and follow the group hedging policy for forward contracts. Finally I would show a sensitivity, for example the effect on group EBITDA of a 5% move in the rupee.

A group has operations in India and the UAE and reports in US dollars. How would you handle currency in budgeting and forecasting?

What the interviewer wants to hear

Model answer

More hard Financial Analyst questions