Currency is a commodity.
Buy it with the other imports - or later
Most foreign currencies - US Dollars, Yen, Euros and Sterling – cost around 2% per annum to buy for a forward date
No forecasting, no speculation
The goal is to add certainty to margins and cash-flow.
Commodity 1:
your import costs A$ … ?
Commodity 2:
locking in foreign currency costs 1-2% p.a. additional cash
Two commodities, both manageable
your import costs A$ … ?
Commodity 2:
locking in foreign currency costs 1-2% p.a. additional cash
Two commodities, both manageable
Alternative management strategies
1. Price in Australian Dollars at today’s spot rate
Savings:
US Dollars: +1.45% per annum from cost of cover (now $zero)
Euros: + 2.74% p.a.
Yen: +1.50% p.a.
100% of increased revenue goes directly to profits
2. Insert repricing clause, sharing benefits and costs of exchange rate movement equally
Savings:
US Dollars: + 0.7% per annum from cost of cover
Euros: + 1.3% p.a.
Yen: + 0.8% p.a.
plus get 50% of all upside.
3. Buy insurance (currency options) to protect downside risk.
(100% insurance costs = forward cover rate in (1) above)
Examples:
Floor:
Protect minimum required profit
Collar:
Cheaper than a floor, but importer gives up most potential to benefit from any favourable exchange rate change
Zero cost collar:
Cheaper than a collar (no cash outlay) but less potential to benefit from favourable exchange rate movement
4. Find alternative, cheaper outright cost – globally.
Virtually every major currency costs around 2% per annum to buy to the settlement date.
Savings:
US Dollars: +1.45% per annum from cost of cover (now $zero)
Euros: + 2.74% p.a.
Yen: +1.50% p.a.
100% of increased revenue goes directly to profits
2. Insert repricing clause, sharing benefits and costs of exchange rate movement equally
Savings:
US Dollars: + 0.7% per annum from cost of cover
Euros: + 1.3% p.a.
Yen: + 0.8% p.a.
plus get 50% of all upside.
3. Buy insurance (currency options) to protect downside risk.
(100% insurance costs = forward cover rate in (1) above)
Examples:
Floor:
Protect minimum required profit
Collar:
Cheaper than a floor, but importer gives up most potential to benefit from any favourable exchange rate change
Zero cost collar:
Cheaper than a collar (no cash outlay) but less potential to benefit from favourable exchange rate movement
4. Find alternative, cheaper outright cost – globally.
Virtually every major currency costs around 2% per annum to buy to the settlement date.
FAQ
Does the cost of cover vary with forecasts of exchange rates?
No. It only changes when interest rates change
What if I contract to buy the foreign currency on the date I need to pay for the goods but the Australian Dollar then collapses?
You pay the agreed rate. The current rate is irrelevant.
Do the banks lose?
Actually, they gain too – from transaction margins and a more credit-worthy client who has no FX risk but a world-wide market.
What else could I do to increase profits but not risk?
Quite a lot. See the attached case study IF Imports for eight alternative strategies
What does Giffnock Consulting get out of this?
Giffnock offers Executive briefings applying the Interactive Financial management system tailored to your opportunities to increase profits.
No. It only changes when interest rates change
What if I contract to buy the foreign currency on the date I need to pay for the goods but the Australian Dollar then collapses?
You pay the agreed rate. The current rate is irrelevant.
Do the banks lose?
Actually, they gain too – from transaction margins and a more credit-worthy client who has no FX risk but a world-wide market.
What else could I do to increase profits but not risk?
Quite a lot. See the attached case study IF Imports for eight alternative strategies
What does Giffnock Consulting get out of this?
Giffnock offers Executive briefings applying the Interactive Financial management system tailored to your opportunities to increase profits.
Download for major case study on importing:
|