Report on Apple Inc Foreign exchange rate and Arbitraging

The project is about investigating the characteristic of arbitrage opportunities in the foreign exchange market and how Apple Inc manages foreign exchange rate and arbitraging.

0
Running head: Report on Apple Inc Foreign exchange rate and Arbitraging
Report on Apple Inc Foreign exchange rate and Arbitraging
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1
Report on Apple Inc Foreign exchange rate and Arbitraging
Executive summary
The project is about investigating the characteristic of arbitrage opportunities in the foreign
exchange market. The types of Arbitrage are explained and the also the impact of arbitraging
on foreign exchange rate. A MNC is analyzed how that company has used Arbitraging from
their operation around the world. The product or services sold by this MNC is widely spread
across the globe and they are subject to open market arbitraging and foreign exchange factor.
The analysis marks existence of number of short lived arbitrage opportunities whose
transaction size is very significant in the world market. The study will be clearing many
concepts and points related to arbitraging because of foreign exchange rate.
The analysis is based on Apple Inc how it manages the foreign exchange rate and how the
company is successfully maintaining the arbitraging. Apple Inc is one of the biggest producer
of the Techno product. The company is committed to provide world class service to its
customers. Like any other company Apple Inc is also practices foreign exchange and
Arbitraging. The company practices business by taking all the factors for limiting risk while
following exchange operation.
Apple Inc has made a whole set of policies for foreign exchange rate risk mitigation and
taking the benefits of arbitraging. Apple Inc is US based multinational company with its head
quarter in Cupertino, California. The company is a huge producer of I-pad, I-phone,
consumer electronics and software. It is among the big four technological companies in the
world. Apple is well known for its size and revenues. Its overall annual revenue totals to
$265 billion for this 2018 fiscal year.
Arbitraging is instantly purchasing and selling of the same product in two different market by
realizing a profit on the change in price. There are many types of arbitraging that has been
discussed in the project and the retail arbitraging is the strategies used by apple Inc.
An exchange rate is the method of measuring the currency value of one country to the
currency value of the other country. The foreign currency exchange rates are a factor risk and
benefit for companies which sell or buy product or service across the globe the companies
needs to make proper strategies to mitigate the risk. The risk and mitigating risk factors have
been discussed in the project. How Apple Inc maintains stable currency exchange rate flow is
also explored.

2
Report on Apple Inc Foreign exchange rate and Arbitraging
The projects details about the policies used by the company and how does it benefits from
heading in the world of foreign exchange and arbitraging. The Arbitraging is in many forms
and the one that is followed by the company is highlighted. The project is study about how
the company is benefiting from the exchange rate and arbitraging and ho w the risk of
currency value change is mitigated and also the benefit taken by the company from
arbitraging.

3
Report on Apple Inc Foreign exchange rate and Arbitraging
Table of Contents
Introduction................................................................................................................................4
Analysis......................................................................................................................................4
Types of Arbitraging:.............................................................................................................4
Foreign exchanges market..........................................................................................................5
The US economic policies.........................................................................................................6
The analysis Apple Inc:..............................................................................................................7
Retail Arbitrage:.........................................................................................................................8
How exchange rate effect the international business.............................................................8
Foreign exchange policy of Apple Inc:..................................................................................9
Policy formulation is based on these factor:..........................................................................9
Apple Inc. methodology to formulate the policy is:............................................................10
Conclusion................................................................................................................................10
Reference..................................................................................................................................11

4
Report on Apple Inc Foreign exchange rate and Arbitraging
Introduction
Arbitraging is one of the most important pillar of financial economics. It is a
technique of simultaneously purchasing at a lesser pricing one market and selling at higher
price in other market to make profit on the spread between the prices. An investment practice
where one party attempts to profit from the inefficiencies in the price of another party by
making transactions that levels the effect of each other. An example is when something is
bought in one country may not be cheaper in other country here the person can gain the
benefit of exchange rate pricing. Or anything bought on the exchange market is sold
immediately back at higher price to other. Exchange rate market across the globe works on
arbitraging on foreign currency. There is a billion dollar market where the exchange rate
arbitrating is utilized to make huge gain. A stock is traded in multiple stock exchange and on
each stock exchange the quote price differs to a very minimum unit. Hence arbitrage is used
to take advantage of the price disparity.
Companies across the globe are utilizing the benefit of arbitraging and exchange rate
conversion. The benefits are huge in Arbitraging. The company Apple Inc is a huge buyer
and seller of electronic products. The company purchases the product from lower currency
value countries like China, Taiwan, India this is a benefiting factor for them as the arbitraging
is benefited from it. The project describes the calculation and the methodology how it
benefits from the currency exchange rate exploitations and Arbitraging.
Analysis
Types of Arbitraging:
Risk arbitrage: this is a kind of arbitraging of buying the stocks in the process of merger &
acquisition. These strategies are used in hedge funds where the target stock are bought and
sells the stock of the acquirer (Nosal, E., & Wang, T. 2004).
Retailer arbitrage- Retail itself means an individual seller who sells the product at different
price in different countries. The biggest example is of E-bay whose products are sold at
different price in different countries.

5
Report on Apple Inc Foreign exchange rate and Arbitraging
Covered interest arbitrage: It’s a financial instrument or a kind of security bought by an
investor in the denomination of a foreign currency and the risk of foreign exchange is hedged
by the sale of forward contract in the process of sale of the financial instrument in the home
currency.
Regulatory Arbitrage: A regulated arbitraging make the profit by benefiting from the
deviation of the regulatory positioning and the real risk.
Triangle arbitrage: the benefit is taken from the condition of disequilibrium in between the
three forex markets. For example 3 economics are utilized and the benefit made from the
difference in the currency of three countries.
Foreign
exchanges market
The foreign exchange market is about currencies trading. It is a place where the
participants are able to buy, sell, exchange and speculate on currencies. Forex market is one
of the largest financial market in the world. A foreign exchange made up of Banks,
commercial companies and broker and investor. It is an instrument of valuing the currency in
foreign currency value. The price keeps fluctuating on the stock exchange and the trading
active 24 hrs. There are several factors that affect the foreign currency exchange rate. The
first point is interest rate paid by the country as that is lucrative for the investors of other
country as they will exchange their currency to invest in their country for higher interest rate
(investopedia, 2019).

6
Report on Apple Inc Foreign exchange rate and Arbitraging
The second factor is the supply of the money by the central bank in one country. If the
supply increases than the value of the money will decrease. This will cause a hyperinflation
which will lead to value of money to decrease and there will be a debt war
(Economicdiscussion, 2019). The third factor is the financial stability of the country if the
country is not stable then the demand for that currency will be low as the interest rate for their
currency will not be paid in comparison to other country.
Forward contract: an agreement between two parties obliging the buyer to purchase the
asset at a fixed price at a future in time. Here the assets that traded are generally Oil, beef,
Orange juice and natural gas and some of the financial instruments are also a part of it. It is a
customized contract between two parties to buy or sell of an asset at a specified price.
Bid and ask spread: In simple words it is a difference between the price at which a trader
will buy and sell the currency. The bid price is at which the trader is willing to pay or “BID”
for a currency. Whereas the ask price is how much the dealer wants for the currency.
The US economic policies
Although the economic state of USA has faced many negative change at all level in
domestic and international level. The economies constantly developing still it is one of the
largest economy in the world. The US economy represents the 20% of the total global output.
The US economy features the most developed and technologically advanced country. The
economy is emerging from a period of many economics tensions (Kotabe, M. 1998). The
economy faced 2008 recession and it is recovering steadily the major factors that got affected
was the employment, foreign exchange due to the interest rate lowering. The most important
indicator of the economy is the GDP which measures the nation production. The GDP is 3%
the unemployment rate is 3.7%. The inflation rate is falling around 1.9%. US manufacturing
rate is expected to be around 3.9% (MONEYZINE, 2019).
These are the basic factors that defines the condition of an economy. The US
economy is considered the most stable economy and the rate are most suitable. The
companies in this region also benefits from the stable economy as the disturbance of political
and legislative are the least affecting the company productivity. The companies find the
policies formulated very suitable for them. Apple Inc is determined to produce innovative,
high quality product and services. There are many laws and rules and regulations that Apple
Inc follows to make the operation of the company smooth and ethical. The company has

7
Report on Apple Inc Foreign exchange rate and Arbitraging
made a revenue of $229.2 billion for the year 2017 half of the revenue was only by selling the
I-phone. It is also said that 105 of the revenue of US is due to the sale of Apple product. The
principle are:
Policies: Honesty, respect, confidentiality and compliance. The honesty means to follow
honesty in business dealing, treating the customers and suppliers with respect and to maintain
the confidentiality of apple information and follow all the law and regulation.
The analysis Apple Inc:
Apple Inc. an American manufacturer of computer peripherals, personal computers,
and computer software. Headquarters are located in Cupertino, California. It is one of the
biggest multinational technology company that designs, develops and sells consumer
electronics, online services. The company is well known for selling I-phone smart phone.
The marketing strategy of the company is followed by many other technology selling
companies. The IOS and Mac laptop is also most expensive and sold products of the Apple
Inc drawing a huge amount of revenues.
The Company is a major giant and the revenue earned for the year2018 stands at 53.3
billion it is an increase of 175 from last quarter. This was due to sale of the international sale
which accounts for 60% of the total sale. The Q3 result are driven by strong sales of I-phone,
services internationally. Luca Maestri Apple’s CFO claims that $11.5 billion and the
operating cash flow is around $14.5 billion. The company paid a dividend of $20 billion to
the investors. Apple Inc makes international sales. The 5 biggest market is Europe which
accounts for 22% of the sales around 20 billion. The China is having a sale of about 19
billion almost around 16% of the total sale. Rest 6% of the sale comes from the Asia and
pacific region. The total revenue coming around 11 billion.
A foreign exchange risk is most affected to the institution who are involved in import
and export of the goods. The companies that offer services or product in multiple countries.
Here the investor should convert the currency to another currency to do any investment and
there arises a risk of change in the foreign currency rate which may or may not favor the
investor. The same risk is faced by Apple Inc as the business is highly expanded throughout
the globe (Jiang, Z. H. U. 2002).
Apple Inc covers the risk of foreign currency exchange rate fluctuation by currency-
Hedging contracts. These contracts are 12 months long duration. Apple has benefited by

8
Report on Apple Inc Foreign exchange rate and Arbitraging
currency –hedging strategy of around $607 million. These hedging strategy has save the
company from huge losses. This step is taken to mitigate the risk which are associated with
volatility by transferring the risk (Apple, 2019). Other American companies has also suffered
from the same unfavorable currency headwinds. The champion is Apple Inc as this company
maintains the capital investment. The change in the price does not generally affects the price
of the product in other countries.
Retail Arbitrage:
Retail arbitraging is a term of currency arbitraging where a product is purchased for a
lower price or at the discounted price an then it is sold at a higher price in other market. There
for making profit from it. The Pros and Con of retail arbitraging is when the company is not
able to sell of the inventory bought. The pros is when the inventory is sold at a good pricing.
The process of procurement and selling the product by arbitraging is practiced by large
number of enterprise. Model remains the dominant theory to describe the relationship
between a stock's risk and return.
Apple is a big enterprise. It does not manufacture all its products and 80% of the
product is purchased from outside and assembled in USA. The product purchased from their
country is bought in their home currency. The currency needs to be converted back to the US
dollar. Thus every month the company makes proper arrangement to not only exploit the
foreign currency exchange rate but also benefits from Arbitraging. Apple Inc uses arbitraging
buy purchasing many important component of its product from other countries and after
manufacturing the product it sell it in their home country price. The suppliers are form any
different countries like China, japan, Malaysia, Taiwan and Philippines. The supply chain is
heavenly located in Asia accounting to 88%. The price of the product is based on many
factors on several factors like currency exchange rates, business practices, local import laws,
taxes and the cost of doing business. This factors varies from place to place a country to
country.
How exchange rate effect the international business.
The profitability of the company directly proportional to the exchange rate. Two
major factors affect the exchange rate:
The open market exchange rate: the interbank or the mid-market exchange rate or the real
exchange rate of one currency expressed in terms of other currency. The currency depreciates

9
Report on Apple Inc Foreign exchange rate and Arbitraging
it benefits the exporters and negatively impacts importers. And vise versa. For example if the
Yuan becomes cheaper electronics parts become attractive.
Foreign currency conversion fee: Generally when an intercontinental business is done the
payments made by the business incurs charges for converting the currency. For both the
payer and the receiver. Banks charges a premium on foreign money there can be third party
bank that may incur extra charge for making the deal (Calvo, G. A., & Rodriguez, C. A.
1977).
Foreign exchange policy of Apple Inc:
Effective foreign exchange management is comprised of tools for assuring the
profitability of the company’s first primary business. Thus to attain the object the company
has [prepared some policies. the absence of a foreign exchange management policy make she
company unprepared to control the adverse effect on fetch currency movement.
Policy formulation is based on these factor:
Transaction exposure: It is the income statement impact of all the payables and receivable
denominated foreign currency. The elements included are dividend, service fee, taxes and
duties.
Translation exposure: It is a risk of the company asset, liability, equity or income as they
will change as a result of the exchange rate. Balance sheet exposure that comes out of
segregation of financial statement of foreign entities into home currency.
Corporate earning exposure: it is assets susceptibility to loss It is a exposure of one tools
that allows the companies ot keep the track of their loss and liabilities by issuing proper
policies. Estimates the impact of currency movement on the after tax target of inflow an
outflow.
Operating exposure: it reflects the effect of exchange rate movement on an entity’s
projected cash flow. It is the extent to which a firm’s cash flow gets affected due to the
change in the exchange rate.
The foreign exchange policy depends on the accounting and cash flow subjects
overall depending on the goals risk tolerance. To make the policy consistent the already
existing company’s policies are set forth for consistency check. The objective and procedure
needs to minimize the negative effect of the currency fluctuation.

10
Report on Apple Inc Foreign exchange rate and Arbitraging
Apple Inc. methodology to formulate the policy is:
To consider the financial objective: To minimize the loss that may result from earning
exposure. To ensure liquidity for global operation and to maintain access to local credit. It is
the practice of the firm to make proper objective to keep the operation work smooth.
Projection objective: The Company needs to take consideration when heading in the risk of
loss is minimal. The cost of covering the position is prohibited or the means to covering the
position are not available.
Establishing the risk threshold: It is the level above which the foreign currency exposure
needs protective actions. It defines the rate of fluctuation in corporate earnings resulting from
adverse exchange rate movement. In other words the amount of cash the company ready to
spend to reduce and protect exposure.
Allocation of treasury responsibility: The decision to allocating the treasury responsibility
is the degree to which exchange management is centralized. For allocating corporate
responsibility should approve techniques for hedging exposures.
Apple follows this rule to follow all objective of risk mitigation. Development of
control policy which is the trading environment need to have a control procedure that applies
to financial institution. It’s the responsibility of the company to address the needs of foreign.
New product development sometimes poses risk for corporate foreign exchange policy. The
company’s duty is to keep the record updated for no risk coming the way of transition. These
are major factors on which Apple Inc has formulated the foreign exchange policies. They
examine the policies to be aligned to the objective of the company. This leads to more
informed decision making and result in less surprises for future.

11
Report on Apple Inc Foreign exchange rate and Arbitraging
Conclusion
The major conclusion from the analysis of the apple Inc is that it has adapted it
pricing factors that has not only benefitted it but also its suppliers. The company has huge
policies derived from many factors and the company has also made the proper execution of
the strategies to get the best outcome in the long term. Hedging is a factor that not only helps
the company from money loss but also maintains a stable position of the company. The
economic factors also plays a major factor in the making the company’s profitability. The
arbitraging factors are used by almost all international company that provides not only
service or that manufactures the product. The major factors analysis in this project is how the
company is benefiting from foreign exchange and arbitraging functions.

12
Report on Apple Inc Foreign exchange rate and Arbitraging
Reference
Apple. (2019). Site Map. Retrieved from https://www.apple.com/sitemap/
Calvo, G. A., & Rodriguez, C. A. (1977). A model of exchange rate determination under
currency substitution and rational expectations. Journal of Political Economy, 85(3),
617-625.
Economicdiscussion. (2019). Foreign Exchange Rate: Meaning and Exchange Rate
Determination. Retrieved from http://www.economicsdiscussion.net/foreign-
exchange/foreign-exchange-rate-meaning-and-exchange-rate-determination/64.
Huchzermeier, A., & Cohen, M. A. (1996). Valuing operational flexibility under exchange
rate risk. Operations research, 44(1), 100-113.
Investopedia. (2019). How do I use an arbitrage strategy in forex trading? Retrieved from
https://www.investopedia.com/ask/answers/forex/forex-arbritrage.asp
Jiang, Z. H. U. (2002). The Market Function of the Stock Index Futures and Enlightening to
Securities Market. Sichuan University of Science and Technology, (4), 19.
Kotabe, M. (1998). Efficiency vs. effectiveness orientation of global sourcing strategy: A
comparison of US and Japanese multinational companies. Academy of Management
Perspectives, 12(4), 107-119.
Lee, J. Y., & Ren, L. (2011). Vendor-managed inventory in a global environment with
exchange rate uncertainty. International Journal of Production Economics, 130(2), 169-174.
MONEYZINE. (2019). Arbitrage Pricing Theory (APT). Retrieved from https://www.money-
zine.com/investing/stocks/arbitrage-pricing-theory-or-apt/
Nosal, E., & Wang, T. (2004). Arbitrage: The key to pricing options. Economic Commentary,
(January 1, 2004).