Accepting foreign currency payments; Woolyjumpers Ltd

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 around.

Net result: No forecasting, no exposure to the US Dollar and an additional A$ 2 Million in profits, or 100% increase in margins.

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