To compare trade exposure, ask of each firm how much of its revenue and costs is in foreign currency. Then apply the currency change to each and compare the net effect in ringgit.
This lesson builds on tracing an exchange rate change and belongs to external business conditions.
What are you comparing?
Exposure has two sides. Revenue exposure is the share of sales earned in foreign currency. Cost exposure is the share of costs paid in foreign currency.
A weaker ringgit raises the ringgit value of foreign-currency revenue and also raises the ringgit cost of foreign-currency inputs. Net exposure is the difference between the two.
How do you work through it?
- For each firm, find the foreign-currency revenue and the foreign-currency costs, in ringgit at the current rate.
- Apply the stated change to each figure.
- Find the net change in profit for each firm.
- Compare, then say which is more exposed and what the case does not tell you.
Worked example
Two firms each have annual revenue of RM1,000,000 and costs of RM800,000, so each makes RM200,000 profit. All figures are invented.
- Pantai Perabot Sdn Bhd in Melaka makes furniture. It exports 60% of its sales, priced in US dollars, which is RM600,000. Its imported timber fittings cost RM80,000 a year, also in US dollars.
- Kedai Kek Seri in Seremban sells only locally. Its imported butter and flour are priced in US dollars and cost RM320,000 a year, which is 40% of its costs.
Scenario: the US dollar becomes worth 5% more ringgit, so the ringgit is weaker.
Pantai Perabot: revenue rises by 600,000 × 0.05 = RM30,000. Costs rise by 80,000 × 0.05 = RM4,000. Net change: +30,000 − 4,000 = +RM26,000, so profit goes from RM200,000 to RM226,000.
Kedai Kek Seri: revenue does not change, because it sells in ringgit. Costs rise by 320,000 × 0.05 = RM16,000. Net change: −RM16,000, so profit goes from RM200,000 to RM184,000.
Comparison and judgement: both firms are exposed, but in opposite ways. Pantai Perabot gains RM26,000 because its foreign revenue is much larger than its foreign costs. Kedai Kek Seri loses RM16,000 because it has foreign costs and no foreign revenue. If the ringgit becomes stronger by the same amount, the signs reverse.
A complete answer adds what the case omits, such as whether Pantai Perabot’s export prices can be changed, or whether Kedai Kek Seri’s customers would accept higher prices. The ratios tool can show how each firm’s profit margin moves.
The mistake to watch for
Mistaken answer: “A weaker ringgit helps exporters and hurts importers, so Pantai Perabot gains RM30,000.”
The student used only the revenue side and ignored the firm’s own imported fittings. The net gain is RM26,000.
Correction: write down both foreign revenue and foreign costs for each firm before stating an effect. A firm labelled as an exporter may also be an importer.
Check yourself
1. Using Pantai Perabot, the US dollar now becomes worth 5% fewer ringgit. Find the net change in profit.
Show answer
Revenue falls by 600,000 × 0.05 = RM30,000. Costs fall by 80,000 × 0.05 = RM4,000. Net change: −30,000 + 4,000 = −RM26,000.
2. Firm C has revenue of RM500,000, of which RM100,000 is earned in US dollars. Its costs are RM400,000, of which RM100,000 are paid in US dollars. The dollar becomes worth 5% more ringgit. What is the net change in profit?
Show answer
Revenue rises by 100,000 × 0.05 = RM5,000. Costs rise by RM5,000. Net change: RM0. The two exposures cancel.
3. Using Kedai Kek Seri, state one action it could consider and one thing the case would need to tell you before you recommend it.
Show answer
It could consider raising prices to cover the RM16,000 extra cost. The case would need to say how customers would respond to a higher price. Other answers, such as finding a supplier who prices in ringgit, are also valid if the evidence needed is stated.
Where this leads next
The next lesson, analyse a regulatory scenario using only supplied rules, moves from money to the rules a firm must follow. You can return to the external business conditions practice set to test all five lessons together.
Our teachers use paired cases like this one in online one-to-one Business tuition to help students reach a judgement instead of two separate descriptions.