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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 it takes fewer Australian dollars to purchase goods priced in foreign currencies, like the Chinese yuan. This can lead to lower import costs for the business. Consequently, the business may enhance its competitive position by offering more competitive pricing for its computers compared to local suppliers. However, if the appreciation is significant, it may also mean that local competitors could be offering products at similar or lower prices, reducing the competitive advantage gained from lower import costs.
Step 2
Justify the method of payment that would be most effective in reducing the business’s financial risk.
Answer
One effective method of payment to reduce the business's financial risk is to use forward contracts. A forward contract allows the business to lock in an exchange rate for future transactions, protecting it from any fluctuations in the currency market. By agreeing on a fixed rate, the business can accurately forecast its costs and set prices without the concern that a sudden depreciation of the Australian dollar will eat into its profit margins. Additionally, this method alleviates other risks associated with payment delays and uncertainties related to international transactions.