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A business imports computers from China and sells them to customers in Australia - HSC - SSCE Business Studies - Question 24 - 2017 - Paper 1
Question 24
A business imports computers from China and sells them to customers in Australia. (a) How will an appreciation of the Australian dollar affect the competitive posit... show full transcript
Worked Solution & Example Answer:A business imports computers from China and sells them to customers in Australia - HSC - SSCE Business Studies - Question 24 - 2017 - Paper 1
Step 1
How will an appreciation of the Australian dollar affect the competitive position of this business?
Answer
An appreciation of the Australian dollar means that the currency has strengthened against other currencies, in this case, the Chinese Yuan. This can lead to several competitive implications for the business:
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Reduction in Costs: The cost of importing computers from China will decrease, as the business will need to spend fewer Australian dollars to purchase the same amount of products. This reduction in costs can create a pricing advantage when competing with local businesses.
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Impact on Pricing Strategy: With lower costs, the business may choose to pass on some of these savings to customers through lower prices, potentially increasing market share.
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Profit Margins: While the import costs decrease, the overall profit margins could be significantly affected, especially if prices need to be lowered to stay competitive.
In conclusion, while the appreciation of the Australian dollar can initially benefit import costs and pricing strategies, it may also require careful consideration of profit margins against competition.
Step 2
Justify the method of payment that would be most effective in reducing the business’s financial risk.
Answer
To reduce the business's financial risk when importing computers, using forward contracts as a payment method would be most effective. Here are the key justifications:
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Hedging Against Currency Fluctuations: Forward contracts allow the business to lock in exchange rates for future transactions. This protects against the risk of adverse currency movements, which can occur after placing an order but before payment is made.
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Budget Certainty: By securing a fixed rate, the business can accurately project costs and budget its expenses over the importing period. This predictability helps with financial planning and cash flow management.
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Cost Management: If the Australian dollar depreciates after the contract is agreed upon, the business will still benefit by paying the previously agreed rate, potentially resulting in cost savings compared to market rates at the time of payment.
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Reducing Speculation Risk: In volatile currency markets, using forward contracts eliminates the speculation associated with fluctuations and allows the business to focus on operational rather than financial risk.
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Better Supplier Relationships: Using forward contracts can create more stable and predictable dealings with suppliers, fostering trust and long-term relationships that can lead to better terms in the future.
Overall, forward contracts are a strategic financial tool that would allow the business to mitigate risks associated with currency volatility and maintain competitiveness.