Vanguard Security International Transaction Dilemma Harvard Case Solution & Analysis

Vanguard Security International Transaction Dilemma

Background of the Company:

Vanguard security Corporation (VSC) is a European company based and headquartered in Portugal. Vanguard Security Corporation was founded in the early 1990s with the primary function of the company to provide financial security to the corporations against the financial frauds on the internet. Vanguard security Corporation’s main clients are the commercial banks in the Europe that have the opportunity to enter in the US market. VSC was primarily computer software and hardware systems company with a strong reputation in the financial services industry as one of the leading providers as well as one of the most expensive providers.
Vanguard security Corporation experienced growth in its revenues and profits during its early growth stages. However, the increased competition from the Asian countries has adversely affected the market of the Vanguard security Corporation and as a result there has been a decreasein the profits and revenues of the company during its initial years.

Problem statement:

Vanguard Security Corporation faced a foreign exchange risk as itwill be receiving money from US in dollars, amounting up to $144.927 million. Vanguard Security Corporation will suffer foreign exchange loss because sterling is depreciating against the dollar therefore,the translation cost will increase. Vanguard Security Corporation has to minimize its risk related to foreign transactions. As the Euro is continuously depreciating against the US dollar, it affects the cash flows and revenue of the company.

1. The forecast for the US dollar as of April 1st for the year ahead:

Purchasing Power Parity:

In the purchasing power parity, the currency exchange rate is the difference between the inflation rates of two countries which is used to forecast the future exchange rates of those countries. The inflation rate in the US was2.3% in 2008 and that of Euro was 2%. As the inflation rate in the US is higher than the Euro,therefore the rate of the dollar will depreciate against the rate of the Euro. The forecastedratein the month of April is calculated as $1.460733/€. The calculations for the forecasted rate in Aprilis given in the excel sheet number two.

GDP Growth Model:

In the GDP growth model, the currency exchange rate is the difference between the GDP growth rates of two countries, which is used to forecast the future exchange rates of those countries. The GDP growth rate in the US was 2.6% in 2008 and that of Euro was 2.2%. As the GDP growth rate in the US is higher than the Euro, therefore the rate of the dollar will appreciate against the rate of the Euro. The forecastedratein the month of April is calculated as $1.459278/€. The calculations for the forecasted rate in April is given in the excel sheet number two....................

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