Money
Issue No. 24 - August/September 2005
Managing currency risk in export
by Professor Richard Blandy
Australian companies engaged in international business face a number of commercial risks when they deal with buyers in other countries. These risks range from the creditworthiness of the buyers to political influences and government regulations. Managing these risks should be regarded as a regular business activity regardless of the size of your business.
One of the main types of risk exporters need to manage is currency risk, the risk of adverse movements in exchange rates. Currency risk cannot be eliminated, but it can be effectively managed.
The orders that you receive are often denominated in a foreign currency that you need to convert to Australian dollars. When the AUD depreciates you receive more for the goods and services you sell overseas. Exporters generally favour a weak AUD and importers favour a strong AUD.
Since the AUD floated in 1983, the average trading range has been about 11 US cents. In 2004 the trading range of the AUD-USD was US 12c. Bear this risk in mind when considering which foreign exchange protection (hedging) strategy is appropriate to your circumstances and needs.
Australian exporters who fail to hedge may be putting a significant part of their total revenue at risk. On an un-hedged exposure of US 1 million dollars, every adverse 1-cent movement in the Australian dollar could cost about AUD20,000* in income (based on a 70 cent exchange rate). Managing foreign currency exposures effectively protects a business against ...
