The Impact of Fluctuations in Currency on the Cost of Wine Flashcards
When wine being imported and exported between countries with different currencies, the constant fluctuation of exchange rates between those 2 currencies affects price of wine considerably. Give an example
eg when buyer in eurozone orders wine from Australia, at AUD 2.00 per bottle ex cellar when exchange rate is AUD 1.50/EUR 1, but at delivery the exchange rate has changed to AUD 1.37/EUR 1. If buyer pays when ordering, will save 0.13 euros per bottle
What can be done to help the effect of exchange rate fluctuations?
- Options
- Fixing the price in the currency of importer at date of ordering
- Buying currency to cover specific orders
- Entering a contract to fix the exchange rate
- Trading in USD/EUR
- Opening a foreign currency account in a local bank
- Opening an account in an overseas bank
How can options mitigate the effect of exchange rate fluctuations?
-importing company takes option/reserve amount of wine at agreed price
-producer sets aside agreed vol of wine and at agreed time, importer decides if they want to take it
-decision could be based on exchange rates but also market conditions at the time
-because producer runs the risk importer won’t take the wine= unsold stock, producer may want to charge higher price than normal contract
-can also take option on certain amount of currency at agreed price
How can fixing the price in the currency of the importer at the date of ordering mitigate the effect of exchange rate fluctuations?
-producers may not welcome this or charge premium as it shifts the currency risk to them
-importers prefer to fix the price in their currency so that they have certainty how much they are paying and can work out their retail price
How does buying currency to cover specific orders mitigate the effect of exchange rate fluctuations?
-requires proactive stance and only larger companies likely to have the in house skills necessary to manage currency in this way
How can entering a contract to fix the exchange rate mitigate the effect of exchange rate fluctuations?
-importers that conduct a lot of business in a particular currency enter into formal contract with bank or other supplier of foreign currency- purchase given amount of currency at agreed exchange rate on specified date.
-importer legally committed to purchasing the currency
-fixed exchange rate and can budget accordingly
How can trading in USD/EUR mitigate the effect of exchange rate fluctuations?
-producers in countries with unstable currencies prefer to trade in more stable currencies
-attractive to importers- greater certainty about price
-as producer also buys vy and winery materials in dollars or euros, reduces number of times they have to exchange= less exposed to fluctuations in domestic currency
How can opening a foreign currency account in a local bank mitigate the effect of exchange rate fluctuations?
-if buyer opens foreign currency account in local bank, payment for goods can be made directly to seller in sellers own currency
-at some point though, foreign currency will still need to be bought, and keeping substantial sum of foreign currency in a current account might not be most efficient use of those funds
-might make more sense with manufacturer who buys component parts in Italy and Spain, produces final product in the UK, and sells in Germany
-all components would be in euros. Not really suitable where goods bought in one currency and sold in another
How can opening an account in an overseas bank mitigate the effect of exchange rate fluctuations?
-same disadvantages of opening a foreign currency account in a local bank, but with more caution.
-banking regulations differ greatly in diff countries, must understand
