When prices move.
WHAT THE EXPOSURE IS
Costs in one currency and revenue in another.
WHY IT MATTERS HERE
Imported inputs are common and rates move substantially.
WHAT HAPPENS WHEN RATES MOVE AGAINST YOU
Landed costs rise after you have committed to a selling price.
WHAT THAT PRODUCES
Margin eliminated, or a loss.
WHAT TO ESTABLISH
Your exposure: what proportion of costs is in foreign currency.
WHAT TO DO ABOUT PRICING
Build in an allowance.
HOW MUCH
Enough to absorb normal movement over your ordering cycle.
WHAT TO DO IN LONGER ARRANGEMENTS
Include a mechanism permitting adjustment.
WHY
Fixed prices over long periods transfer all the risk to you.
WHAT TO DO ABOUT TIMING
Reduce the period between committing to a purchase and settling it.
WHY
Exposure exists only while the position is open.
WHAT OTHER MEASURES EXIST
Holding foreign currency, where permitted and practical Forward arrangements, where available Matching foreign revenue against foreign costs
WHAT MATCHING MEANS
Earning in the same currency you spend in.
WHY IT IS THE MOST EFFECTIVE
It removes the exposure rather than managing it.
WHAT TO MONITOR
Rates, and your landed costs.
WHAT TO REVIEW
Prices, whenever rates move materially.
WHAT TO AVOID
Absorbing movement silently until margin disappears.
