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Economic risk Explanation in one of the technical articles on the ACCA website left me confused. It states that if the euro weakens against the pound and a UK exporter is exporting goods to the An Eurozone country, the goods will become less competitive in the European market.
I understand how the exporter would suffer a loss since he will be suffering adverse rate movement when converting the euro to pounds. However, I don’t understand why the goods would become less competitive in Europe. The only explanation that I could think of was that the importer has beared the exchange risk (paid the exporter in pounds) making his cost higher and consequently the sale price even higher in the European market. Could you please confirm my understanding.
Also, when studying of exchange risk hedging techniques for importers and exporters, what’s the assumption regarding the party bearing the risk? Does the buyer always bear the risk?
Thank you.Also, later in the article, it says goods imported from Europe (considering same scenario where the euro has weakened against pound) will be more competitive in the UK market.
Again, this can only be the case if the UK importer bears exchange risk (pays in Euros) as he will now purchase euros at a more favourable rate. Which brings me again to the question of Party bearing the risk. The article seems to suggest that it’s always the buyer.
Please confirm my understanding.
Really need to understand this.In future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
If the company is in the UK, then if invoicing and payment is in UK pounds, the risk is borne by the other party.
However, if the company is in the UK and invoicing and payment is in a different currency, then the risk is suffered by the company.This is explained in my free lectures on foreign exchange risk management. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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