2.14: The Impact of Fluctuations in Currency on the Cost of Wine

Question 1

What are the 7 methods used to mitigate the effect of exchange rate fluctuations?

Answer 1

1. Options
2. Fixing the price in the currency of the importer at the date of ordering
3. Buying currency to cover specific orders
4. Entering a contract to fix the exchange rate
5. Trading in USD/EUR
6. Opening a foreign currency account in a local bank
7. Opening an account in an overseas bank

Question 2

What is the downside of fixing the price in the currency of the importer at the date of ordering?

Answer 2

• producers might not agree to this

- producers may charge a premium

Question 3

What is the benefit of opening a foreign currency account in a local bank?

Answer 3

• payment for goods can be made direct to the seller in the seller’s own currency

Question 4

When would a foreign currency account in a local bank make sense? When would it not?

Answer 4

• In the case of a manufacturer who buys component parts in Italy and Spain, produces the final product in UK but sells it in Germany. All the transactions would be in Euros
• Not suitable where goods are bought in one currency and sold in another.