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Thank you for the following reply:
“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”I understand your point. The part about whoever pays in or receives foreign currency bears the risk is clear. However, what I don’t understand is why the technical article (I’ll link it down below) assumes for a fact that that the buyer in both cases bears the risk. Quoting the article
” For example, if a company is exporting (let’s say from the UK to a eurozone country) and the euro weakens from say €/£1.1 to €/£1.3 (getting more euros per pound sterling implies that the euro is less valuable, so weaker) any exports from the UK will be more expensive when priced in euros. So goods where the UK price is £100 will cost €130 instead of €110, making those goods less competitive in the European market.
Similarly, goods imported from Europe will be cheaper in sterling than they had been, so those goods will have become more competitive in the UK market”Doesn’t this assume that in both instances the buying party bears the risk? I mean why else would the goods become less competitive in the European market upon the euro weakening against the pound and more competitive when they are imported from Europe?
Why hasn’t the author explained that this would happen only if we are assuming that the foreign currency risk is born by the buyer?
Here is a link to the complete article
“https://www.accaglobal.com/middle-east/en/student/exam-support-resources/fundamentals-exams-study-resources/f9/technical-articles/forex.html”Thank you.
I do apologise – I answered your question too quickly before, without realising it was about economic risk as opposed to translation risk. (You cannot be asked calculations involving economic risk – only transaction risk – but you are expected to be able to mention it).
The point is that if you are exporting from the UK and invoicing in Pounds, then if the pound gets stronger then it makes it more expensive for the purchaser (because it will cost more of their own currency to buy the pounds). This will make the goods less competitive (they may then be more expensive for the purchaser than if they had bought the goods from a supplier in their own country) and you might therefore sell less. Similarly, if the pound gets stronger, then it makes the goods less expensive and therefore more competitive – you might therefore be able to sell more.
This is always a risk if you are exporting and invoicing in your own currency. Although the amount you receive for what you sell is fixed (because you are invoicing in pounds), the risk is that the amount you sell might change because of your goods becoming more or less competitive.
The article could have explained it better. In fact this is only really one aspect of economic risk. Perhaps a more obvious (although more extreme) example of economic risk is that it will be harder to collect debts from a foreign customer than from a local customer – therefore there is likely to be more risk of irrecoverable debts if you export. This again is classed as economic risk.
So in a nutshell, UK exporter invoicing in pounds and pound strengthens against euro would give rise to:
-the European customer paying more to the U.K. Supplier
-the goods costing more to the the European customer hence becoming expensive in the European market as opposed to being purchased from a local supplier
-the sales volume of a competing European Supplier (dealing in same goods being imported from U.K.) taking a hike while the sales volume of the U.K. Exporter suffering a lossA U.K. Importer paying in euros and the pound strengthens would mean:
-the goods costing lesser to the U.K. Customer
-the goods cost less so would become cheaper in the U.K. Market as opposed to being purchased from a Local UK supplier
-the sales volume of competing local UK suppliers suffering and the sales of European exporters taking a boastThis kind of means that if a country’s currency strengthens, the exporters would suffer? And if it weakens the exporters would benefit?
Please confirm my understanding.
Thank youWhat you have written is correct 🙂
The only thing I would add is that rather than say ‘exporters would suffer’ and ‘exporters would benefit’ would be that they would ‘potentially suffer’ and would ‘potentially benefit’.
(It is a tiny point, but the reason I have written that is that if (for example) they were the only company supplying the particular product, then the buyers would have no choice but to carry on buying. In practice there are however usually likely to be other suppliers which would then mean that they were likely to sell more or less 🙂 )
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