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Foreign exchange
risk management

TR Pty Ltd, is a fashion retailer based in Melbourne, which imports goods from China.

Peter is the financial controller at TR Pty Ltd. He is organising shipments from China that will cost the business USD 100,000 per month.

Peter needs to manage their foreign exchange risks in order to monitor business costs and keep prices competitive for their customers.

Foreign exchange risk (also known as currency risk) is the risk of adverse movements in the value of transactions due to movements in the exchange rate.

Click on Peter to learn more about exchange rate volatility.

Exchange Rate Volatility

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An exchange rate is one currency expressed in terms of another. For example, one Australian Dollar is worth 0.75 US cents, which is expressed as AUD 1 = USD 0.7500. Over the last 10 years, in the most volatile year, the AUD/USD traded in a 38 cent range, seeing a high of 0.9849 and a low of 0.6004 and in the least volatile year, it traded in a 12 cent range seeing a high of 1.0856 and a low of 0.9579.

If we use a current exchange rate of 0.7450 as the midpoint, and assume a 17 cent range over a 12-month period, the AUD/USD range could be 0.8300 to 0.6600 in one year.

Click on each point in the graph to discover how the volatility in exchanges rates could affect the cost for TR Pty Ltd of purchasing USD on an ongoing basis. dialog end
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A day of appreciation

If TR Pty Ltd purchased USD100,000 when the AUD/USD appreciated to 0.8300, it would cost them approximately $120,500 (100,000 divided by 0.8300)

The purchase is a saving of approximately $13,750 for TR Pty Ltd as a result of the move in the exchange rate from 0.7450.

A day of depreciation

If TR Pty Ltd purchased USD100,000 when the AUD/USD had depreciated to 0.6600, it would cost $151,500 (100,000 divided by 0.6600).

This means the purchase is $17,300 more expensive for TR Pty Ltd as a result of the move in exchange rate from 0.7450.

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