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I wanted to ask you the case where the changes in exchange rate cause difference impact on Importer & Exporter.
Suppose we are a UK exporter expecting to be paid US$1m for machinery to be
delivered in 3-months time.As importer:
If the £ strengthens against the US$ in 3-months time
[This simply means that we have to pay less since we have to pay in £’s]However, If the £ weakens against the US$ in 3-months time
[This simply means that we have to pay more since we have to pay in £’s]__________________
As exporter
If the £ strengthens against the US$ in 3-months time
[This simply means that we have to receive less since we have to receive in $’s]However, If the £ weakens against the US$ in 3-months time
[This simply means that we have to receive more since we have to pay in £’s]Please correct me If I am wrong!
What you have written for the exporter (who is in the UK and works in Pounds) is correct.
However as far as the importer is concerned (who is in the US and works in Dollars) then if they are paying in $’s they are not affected by changes in the exchange rate. It is the exporter who has the problem.
I have illustrated an example with the help of a question I asked in an earlier post could you please tell me whether it is correct or not. Thank you!
IMPORT:
If Local Currency (£) strengthens against Foreign Currency ($)
Today Spot rate : $1.5 / £1
Future Spot rate : $1.6 / £1As we can see that $ has depreciated against £ if we purchase machinery worth $1m then we would have to PAY
As per Today Spot rate = $1m / 1.5 = £0.667m
As per Future Spot rate = $1m / 1.6 = £0.625m[Therefore, if Local Currency appreciates; We PAY less £’s in future]
If Local Currency (£) weakens against Foreign Currency ($)
Today Spot rate : $1.5 / £1
Future Spot rate : $1.4 / £1As we can see that $ has appreciated against £ if we purchase a machinery worth $1m then we would have to PAY
As per Today Spot rate = $1m / 1.5 = £0.667m
As per Future Spot rate = $1m / 1.4 = £0.714m[Therefore, if Local Currency depreciates; We PAY more £’s in future]
____________________________________________________________
EXPORT:
If Local Currency (£) strengthens against Foreign Currency ($)
Today Spot rate : $1.6 / £1
Future Spot rate : $1.8 / £1As we can see that $ has decpreciated against £ if we sell a machinery worth $1m then we would have to RECEIVE
As per Today Spot rate = $1m / 1.6 = £0.625m
As per Future Spot rate = $1m / 1.8 = £0.556m[Therefore, if Local Currency appreciates; We RECEIVE less £’s in future]
If Local Currency (£) weakens against Foreign Currency ($)
Today Spot rate : $1.6 / £1
Future Spot rate : $1.4 / £1As we can see that $ has decpreciated against £ if we purchase a machinery worth $1m then we would have to PAY
As per Today Spot rate = $1m / 1.6 = £0.625m
As per Future Spot rate = $1m / 1.4 = £0.714m[Therefore, if Local Currency depreciates; We PAY more £’s in future]
I refer you back to my previous post.
Your original post had a UK company invoicing a US company in dollars and therefore going to receive dollars.As a result what you had written for the exporter (the UK company) was correct.
The US company was the importer and if they had been invoiced in dollars by the UK company then they would pay $’s and would not be affected by changes in the exchange rate.
If the UK company had imported something from the US and had been invoiced in dollars. Then they would have to buy dollars to make the payment. If the dollar had strengthened (and the pound weakened) then it would end up costing more pounds. If the dollar had weakened (and the pound strengthened) then it would end up costing less pounds.
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