Accepting foreign currency payments; Woolyjumpers
Woolyjumpers Ltd is an exporter of wooly jumpers.
It has a contract with the US government to provide clothing for
troops in Afghanistan. The contract is for A$100m, to be paid on
delivery in 12 months. The CEO of Woolyjumpers expects to make a Net
Profit of A$2,000,000.
However, on the day the contract is to be signed,
the CEO proposes to the Americans that the contract be written in US
Dollars at the current exchange rate of AUD/USD 0.5000. The Americans
are happy to do this as it removes their FX risk.
The CEO of Woolyjumpers is also pleased, as the
company has just doubled its profits to around A$4,000,000.
How? The CEO of Woolyjumpers sells the US$ 50
Million and buys A$ 102 Million for delivery through the forward
market. You can get these prices in every copy of the Australian
Financial Review, or we can get an even better rate by shopping
Net result: No forecasting, no exposure to the US
Dollar and an additional A$ 2 Million in profits, or 100% increase in