1. Why does a fall in the value of the Australian dollar against the U.S. dollar benefit Billabong?
Billabong locates in the Australia and is a big exporter its products to the United States. Therefore, its profit is calculated in the Australian dollar over gathered foreign currency depending on an exchange rate. The foreign currency is the U.S. dollar, so if the Australian dollar falls in the value against the U.S. dollar, the value of gathered Australia dollar becomes greater than after exchanging from the U.S. dollar. Therefore, Billabong is enjoyed.
2. What might Billabong have done in order to better protect itself against the unanticipated rise in the value of the Australian dollar that occurred in 2009?
In 2008, when the Australian dollar fell in the value against the U.S. dollar, Billabong was enjoyed from changes of exchange rate between the two currencies. Billabong should accumulate its profit from the changes of exchange rate to provide for adverse changes if they happened in the future. It is a general principle of the accounting. In 2009, when the Australian dollar's value increased against the U.S. dollar's value, the accounting department would recalculate to compensate for the deficit from the reserve profit of changes in exchange rate in 2008. Only if the reserve profit cannot compensate for the deficit by the changes of the exchange rate of foreign currency, Billabong should increase its product's price to compensate for the deficit. It seems the increase of product price should be a final solution of companies in the market economy.
Management Focus: Volkswagen’s Hedging Strategy
1. Explain how Volkswagen’s failure to fully protect itself against foreign exchange fluctuations had a negative effect on the company. What can Volkswagen and other companies learn from this experience?
The problem of the exchange rate of foreign currency is unable to predict the rate's unusual changes. It seems like a gamble rather than limited in range of calculation. Volkswagen knew the problem, so it bought a forward contract to stabilize exchange rate for dollars at the future time. It seemed Volkswagen executed hedging in many passed years, and it realized the expense of the hedging was not cheap. And perhaps the euro would decrease its value against the dollar. Therefore, in 2003 it cut to decrease the expanse of the hedging down at 30%, instead of 70% as every passed year. Unfortunately, the decision caused a cost of about 1 billion euro stemmed from the fall in the value of the dollar against the euro. After failing, Volkswagen bought a forward contract for the dollars to keep the stably exchange rate in the future. This is a difficult lesson to learn. Simply, people say exporters should buy the forward contract for foreign currency in their export market, as Volkswagen did after failing, regardless of predicting of the foreign currency values. Or, perhaps the exporters should exchange the foreign currency at once as possible in short period of time in the foreign market, without waiting for the end of the fiscal year.
2. Volkswagen saw its fourth quarter 2003 profits tumble 95 percent after losing €1.2 billion in currency losses after the euro rose relative to the U.S. dollar. Why was Volkswagen so vulnerable to the change in the value of the euro relative to the U.S. dollar?
Volkswagen is a company located in the Germany, manufactures its products in Germany, and then exports them to the United States. Therefore, its profits are drawn in the balance sheet in euro at the end of the fiscal year. That is why its profit earned in the United States has to be exchanged from the U.S. dollar for the euro, even thought the exchange causes Volkswagen much vulnerability. If Volkswagen invests a plant to manufacture in the United States, the profit transfers back to Germany still vulnerable by changes of the exchange rate.
