IBU 221/ 001
Billabong is an Australian company. They make surf wear, from wet suites and board shorts to T-shirts and watches. 80% of Billabong sales are from outside of Australia. 50% of which are from the United States. Billabong is reliant on a strong U.S. dollar against the Australian dollar. Billabong relied on the fact that the rapidly weakening Australian dollar in 2008-2009 and waited for profits to skyrocket. Due to the increase in demand of Australian exports and sell-off of U.S. dollars the Australian dollar strengthened drastically and the U.S. dollar weakened destroying any competitive price advantage Billabong had. One cent movement in the U.S./Australian dollar exchange rate means a 0.6 percent change in profit for Billabong. 2009 Australian dollar gained its value, predicted 10 percent in profit decline for Billabong.
1. Why does a fall in the value of the Australian dollar againts the U.S. dollar benefit Billabong?
Billabong relied solely on the foreign exchange market especially on the United States with 50 percent of company's annual sales.
Whenever the U.S. dollar gets strong against Australian dollar, it makes their product less expensive in United States. When product becomes inexpensive it generates sales and increases company's profit. The company's CEO stated that every cent movement in the U.S./Australian dollar exchange rate means a 0.6 percent increase in profit for Billabong. Whenever Australian dollar increases it value in exchange for U.S. dollars Billabong product price increase, which causes in decrease of sales and decrease in profit.
2. Could the rise in the value of the Australian dollar that occurred in 2009 have been predicted?
It could have not been predicted to be exact but it can give an idea of the increase by looking at the currency exchange rate forecast. The...