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An Australian-owned business manufactures bicycles in China and sells them to wholesalers in France - HSC - SSCE Business Studies - Question 24 - 2013 - Paper 1
Question 24
An Australian-owned business manufactures bicycles in China and sells them to wholesalers in France. These wholesalers do not pay in advance. (a) Describe ONE metho... show full transcript
Worked Solution & Example Answer:An Australian-owned business manufactures bicycles in China and sells them to wholesalers in France - HSC - SSCE Business Studies - Question 24 - 2013 - Paper 1
Step 1
Describe ONE method of payment the business could use to ensure that it receives payment for the sales.
Answer
One effective method of payment is to use a letter of credit. A letter of credit is a financial document issued by a bank on behalf of the buyer (the French wholesaler) that guarantees payment to the seller (the Australian business) as long as specific conditions are met. When the business ships the bicycles, it will present the required shipping documents to its bank, which will then request payment from the buyer's bank. This method provides a secure way for the business to ensure it receives payment, as it minimizes the risk of default by the buyer.
Step 2
How could this business protect itself against a change in the value of the Australian dollar relative to another currency?
Answer
The business could protect itself from fluctuations in currency value by using hedging strategies, such as entering into forward contracts. A forward contract allows the business to lock in a specific exchange rate for a future date, providing certainty about the cost in Australian dollars when receiving payment in another currency. This way, the business can safeguard against potential adverse movements in exchange rates, ensuring profitability and financial stability in international transactions.