This document discusses currency exchange risk and how international marketers manage it. It provides an overview of currency risk and exchange rates. Currency risk occurs when companies have assets or operations across borders or loans in foreign currencies. Exchange rates determine the value of one currency relative to another. The document then discusses sources of exchange rate risk, how the foreign exchange market works, factors that influence exchange rates, and strategies international marketers can use to manage currency risk such as hedging and adjusting prices.

1. Currency Exchange Risk
Overview

2. Currency Risk
Currency Risk - is a form of financial risk that occurs
from the potential change in the exchange of
one currency in relation to another. Investors or
businesses face an exchange rate risk when they
have assets or operations across national borders or
if they have loans or borrowings in a foreign
currency.

3. Exchange Rate and Exchange Risk
• Exchange rate: the ratio that exchanges
one currency into another
Example: exchange rate A$1.00 = US$0.80,
so 1 tonne of Australian coal @ A$160/metric
= US$128/metric
• What is exchange risk?
– Exchange risk arises in an international transaction when buyer and seller use
different currencies, and time elapses between sale and payment, example -
• Australian coal sold today 10,000mt @ A$160/metric = A$1,600,000
• Exporter sells in US$, so selling price is A$1,600,000 x US$0.80 =
US$1,280,000
• Payment terms are 30 days from date of shipment (FOB Newcastle)
• Exchange rate today: A$1.00 = US$0.80. In 30 days: A$1.00 = US$0.85
• Payment received in 30 days: US$1,280,000/US$0.85 = A$1,506,000
• Outcome: exporter LOSES A$1,506,000 – A$1,600,000 = -A$94,000

4. International Marketers Dilemma
International marketer’s dilemma: Do I sell in my own currency to avoid
risk (e.g. A$), or in buyer’s currency (e.g. US$, Yen, Euro)?
– If own currency, may lose sales due to lack of
customer orientation, foreign country
regulations, lack of convertibility etc.
– May be contrary to industry norms (some world
markets are denominated in US$, e.g. oil)
– If foreign currency, may be benefits, e.g. lower
interest rates in foreign country, profits from
astute currency management

5. Sources of Risk from Exchange Rate
Fluctuations
1. Transaction risk: e.g. foreign transaction sales
currency depreciates reduced return to
exporter.
2. Competitive risk: exporter’s own currency is
appreciating, disadvantaging exporter’s
manufactures from home market, (e.g. A$ =
US$0.52 in 2001 to US$0.90 in 2008 = 73%
increase).
3. Market portfolio risk: MNE is limited to a
narrow range of markets, i.e. is not diversified, so
cannot balance exchange rate via multi-country
operations.

6. What is the Foreign Exchange Market
The forex market is a real-time network of banks, brokers and
forex dealers in many countries. It has no fixed
trading floor like the LME, Baltic Exchange or Chicago
Mercantile Exchange. It exists only on computer screens. US$1.9 trillion
daily turnover worldwide.
Main forex market centres (over 50%) are London, New York &
Tokyo. These overlap in time zones so market activity
flows around the world 24 hours/day. Other important
trading hubs are Singapore, Sydney, Frankfurt, Paris, Hong Kong &
Zurich.
Forex market operates at retail & wholesale levels: retail
includes exporters exchanging and hedging currencies for transactions,
wholesale is the inter-bank market trading (and speculating) between
market participants.
The forex market most closely approximates the conditions of a
‘perfectly efficient’ market: universal availability & transparency of
information, speed of transmission, homogeneity, no barriers to entry.
BUT: Gov’ts sometimes intervene to reduce volatility.

7. What Determines Exchange Rate Levels
1. Main traded currencies are ‘floating’, i.e. free from Government
intervention (e.g. US$, A$ since 1983, GBP). Some others are
‘fixed’, i.e. the Gov’t decides the exchange rate.
2. Fixed currencies are subject to occasional devaluations (or, rarely,
revaluations) sudden big drop in currency value. Speculators often
make a killing (e.g. George Soros in 1992, GBP1bn profit). Non-
trade currencies priced on ‘cross rates’.
3. Floating currencies’ exchange rates are determined by forces
of supply & demand as in ratio of exports to imports, interest rates,
inflation, Gov’t economic policy, even forex market sentiment (e.g.
A$ value is seen in part as linked to commodity prices).
4. In the long term, exchange rates reflect the economic success of a
country.

8. How do International Marketers manage
exchange risk?
1. Risk shifting (short term) e.g. hedging:
• Immediate currency conversion is a ‘spot’ transaction
• Conversion in the future uses a ‘forward exchange contract’: a bank agrees
to fix an exchange rate at a set date in the future (expressed as a premium or
discount on the spot rate, equal to the interest rate differential between
the two countries), thus giving the exporter certainty in their exchange rate.
• Generally, exporters want to sell goods, not speculate on currencies.
2. Risk modifying (long term, strategic):
• Involves marketer manipulating prices or other elements of their marketing
strategy.
• Export prices may be adjusted or not depending on market conditions (‘pass-
through’ vs. ‘absorption’).

9. Strategic Risk Modifying Behaviour by the
International Marketer
Scenario:
Holden is selling its new Monaro to the US (rebadged the Pontiac GTO). A$ rises
against US$ from US$0.60 to US$0.90 (= 50% increase in cost of your
product to GM USA). What do you do?
1. ‘Pass-through’: you keep your price
unchanged forcing the buyer to pay
more loss of competitiveness
loss of market share? Depends on
buyer’s level of preference for product (demand).
2. ‘Absorption’: you reduce your export price correspondingly as the A$
appreciates your sales revenue correspondingly reduces, even to a loss.
Goal of long-term market share maintenance?

10. In the 1990s the US Dollar appreciated hugely making imports cheaper to
US consumers. Foreign car companies found they had windfall gains.
Keep gains as extra profit, or pass to consumer as cheaper prices?

11. Strategic marketing considerations to
exchange rate movements
1. Short-term:
Pricing-to-market: varying your trading terms for each
market depending on conditions there.
– Considerations: is market price-sensitive?, local competitors’
reactions, value placed on price stability (e.g. Harley Davidson),
alternatives to discounts.
2. Long-term:
– Market refocus
– Streamline operations/seek efficiencies
– Shift production e.g. offshore via FDI

12. You are welcome to contact Nigel Bairstow at B2B
Whiteboard your source of B2B Asia / Pacific
marketing advice
http://www.linkedin.com/pub/nigel-bairstow/6/41b/726
http://twitter.com/#!/b2bwhiteboard