BSB119 – GLOBAL BUSINESS
LECTURE 10: FOREIGN EXCHANGE AND INTERNATIONAL BUSINESS
1. Issues confronting IB with foreign exchange and payments
2. Foreign exchange market – functions and rates
3. XR risk exposures and management
4. IB payment systems
What factors influence the exchange rate of a currency?
To what exchange rate risks are international firms exposed?
What strategies can IB use to manage these risk exposures?
Why is there a need for a trusted third party in IB transactions?
In terms of costs and risks is a letter of credit payment system more beneficial to the exporter or
Issues Confronting International Business
Foreign currency exchanges – risk exposures and management
o As rates change, the price competitiveness of goods also changes.
o Most critical variable in international business
o To undertake FDI, a business must buy foreign currency to move capital into the country or
sell foreign currency to repatriate profits
How to ensure payment is received for the goods?
Lack of trust - dealing with a stranger at a distance – consider the impact of different factors
including geography, cultural, legal systems
Difficulty of enforcing contractual obligations across borders – how can this be done? Under which
jurisdiction does the contract fall?
Competition – e.g, losing business to competitors who sell on open accounts
Exchange Rate Movements
Future cash flow projections, profitability, competitiveness and the ability to service debt can all be
impacted by foreign exchange volatility when paying or receiving foreign currency.
All businesses trading overseas and increasingly in domestic markets, will have some exposure to
exchange rate movements either directly or indirectly.
o Level of exchange rate and variability should be monitored
o Unexpected changes are a risk to the profitability of international trade and investment as is
instability in the international monetary system Foreign exchange market:
includes interbank market
and securities exchange
International capital market:
include sthe bond market,
the equities market and the
euro currency market
Driza-Bone Video – IMPORTANT FOR TUTORIAL HW
Australian company – national brand
o Australian icon
o Reflects our personality
A weather proof oil-skin coat designed for horse riders
CEO came over in 1989 – English company bought Dizza-bone to caretake the company. English
company bought it for the brand name
o Left to his own devices to control the business
Adopted an entrepreneurial approach – very successful in the first 7/8 years
Was not covering all of Australia
o Opened up to sell to all of the nation
Big country with a limited population. Unless you can sell to all of them, the market is very limited
Expanded to NZ – initial exporting attempt.
Learnt a lot of lessons – easy first market because same legal structure and interpretations
o Developed business a lot there
o Developed a strong service ethic and delivery on time ethic
o Listen to what the customer wants
o The entity works in NZ$ - Drizza-bone takes the currency risks
People ask to sell it in other countries a great deal – considered the ones who were small and were
passionate about the product/brand
Successfully started exporting to the UK, US, South Africa and Japan
All manufactured here and manufactured there
Built up from $0 in 1989 to $6/7m in 1997. This placed the company in the top 500 Australian
exporters at the time
1997: major problem with exporting was currency.
Currency movement is the most difficult part of exporting
At the time, the Australian dollar was appreciating against the worlds currencies
Impact of AU$ is huge due to the movement which has occurred – moved from 48c US to $1+
Very difficult to hedge cash flows – provides a great deal of uncertainty
This destroyed the company margins
Also negatively impacted cash flow – increased transport and duty costs
Tariffs would not have impacted or protected against this
The most understated and difficult and potentially disastrous area which is largely ignored Companies should be looking to hedge cash flows based on external advice regarding where their
cash flows should be.
Significant part of the business became unprofitable – losing money in the US and UK
Incurred a significant amount of debt – owners of the business felt it had become unmanageable
Fired the managing director
Tools in the market today (which were not available in 1997) are far more deeper which allow for
Driza-bone expecting income in to hedge their position in cash flows for the next 12/18 months.
Today, hedging can be done for 4/5 years.
You are anticipating cash flow to come in, in a few years time, if you do better you will be over
hedged but if you do worse, you will be under hedged
Need to seek financial advice regarding what cash flows you are seeking to hedge
Company was sold
Investment company purchased it and they re-hired the former director
Company reduced management structure, number of meetings and time spent on meaningless
discussion which helped
Encouraged people to provide solutions to issues
Management team is much younger
Increased marketing – used in the Sydney 2000 Olympics
Sought to diversify product line
Broaden the range of domestic products to provide more balance
Sponsorship is a very effective tool – worked with sporting teams
Company attitude has changed
Use short-term contracts of work because companies close down regularly, more economic driven
and adopt global business attitudes
Everything is international – everything is fast paced
Crucial to be efficient and productive. You need to be the best.
You cannot rest on your laurels
Great export opportunities for Australian products. Products provided need to be in the top quarter
of the market – very difficult to achieve.
2 choices for exporters: differentiate your product (differentiate yourself from the global market
and move forward) or be a low cost provided (high turnover). Decide which end of the spectrum
Company has been adapted to meet the demands of the area being worked in. When products sold
in America – adopt their sizing rules. US zips are on the other side for males.
Different advertising, presentation and what is given at trade shows. Buyers are given multiple
options. There are many competitors for Drizza-Bone in the clothing industry but also, in the
electronics industry because of the significant amount of money consumers spend on these factors.
Message: not buying a jacket, you are buying a shirt. The product needs to have meaning to your
The company needs to be versatile – product range now includes mobile phone pockets. The
company also makes raincoats for dogs – look outside the square to survive.
Always a benefit to learn about the country
Garmets are now sourced from China – it is accepted that companies have to source goods from
Emphasis on design
Started to export to New Zealand.
Learnt a lot of lessons – NZ is easy because the law is the same
Developed business there – developed a strong delivery on time ethic Decided to work in NZ$
Did not assist that everything should be converted and then take a currency risk
Strength of the product: people ask if they can sell it in their country a lot
Considered the country and tended to take on small companies with people who were very
interested in the brand.
Resulted in successful exports in the UK and US and now, South Africa and Japan
Built up from nothing in 1989 to $6m in 1996/7 – top 500 Australian exporters
Small company in global terms
1997: major problem is currency movement - most difficult management problem
AU$ appreciated against all the world’s currencies
Exporting to Germany and the currency was increased by 10% / month
Crucial factor – impacting on imports and exports
Difficult to hedge position due to significant growth. Provides a great deal of uncertainty when
trying to manage cash flows
This destroy’s product margins and cash flow
Tariffs provide protection – currency has moved 100% in the past year. No tarrif will provide against
Most understated difficult and potentially disastrous area which is ignored.
Company should be looking to hedge some of cash flows – based on external advice
Driza-bone incurred a significant amount of debt due to the changes
IN 1997, they fired the CEO
Foreign Exchange Market
Market where currencies are bought and sold and the exchange rate is determined
Market for converting currency
o Market never sleeps
Exchange rate: rate at which once curren