To compare the risk profile faced by Winwin Ltd. and Goody Ltd
To compare the risk profile faced by Winwin Ltd. and Goody Ltd., we can analyze the impact of foreign exchange rate risk on their operating income. Since Winwin Ltd. sells its finished products in EU countries, it is exposed to currency risk since its production cost is denominated in euros and its revenue is in euros. On the other hand, Goody Ltd. sells its finished products in the home market, so it is not directly exposed to currency risk.We can illustrate the risk profile faced by Winwin Ltd. and Goody Ltd. using a graph, where the x-axis represents the exchange rate between USD and EUR, and the y-axis represents the operating income.
For Winwin Ltd., as the exchange rate between USD and EUR decreases (i.e., the USD weakens), the operating income decreases since the revenue earned in euros is worth less in USD, while the production cost remains constant in euros. On the other hand, as the exchange rate increases (i.e., the USD strengthens), the operating income increases since the revenue earned in euros is worth more in USD.
For Goody Ltd., since it sells its finished products in the home market, its operating income is not directly impacted by currency fluctuations. Therefore, the graph for Goody Ltd. would be a horizontal line, indicating that the operating income remains constant regardless of the exchange rate between USD and EUR.
Overall, Winwin Ltd. faces a higher risk profile due to its exposure to currency risk, while Goody Ltd. has a lower risk profile since it sells its finished products in the home market and is not directly impacted by currency fluctuations.
Steps to draw a graph:-
The graph would have two lines, one for Winwin Ltd. and one for Goody Ltd. The x-axis would represent the exchange rate of the euro to the dollar, and the y-axis would represent the operating income of each company.
The line for Winwin Ltd. would have a negative slope, indicating that as the exchange rate of the euro to the dollar decreases, their operating income decreases due to the increased cost of production in euros.
The line for Goody Ltd. would have a relatively flat slope, indicating that their operating income is not affected by changes in the exchange rate since they sell their products in the home market denominated in dollars.
Therefore, the risk profile for Winwin Ltd. is higher as they are exposed to foreign exchange rate risk, while the risk profile for Goody Ltd. is lower as they are not exposed to such risk
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