Photo Credit: Tracy Olsen
Commenting on our last post, Matt raised an excellent issue about currency hedging which I think warrants it's own post. Neither Mike, Jodie nor myself have worked in finance so I'd love to hear people's thoughts on this.
Currency hedging for us would essentially mean locking in a Hong Kong to Australian dollar exchange rate. We pay for our shoes in Hong Kong dollars but receive payment from our customers in Australia dollars. So if the Hong Kong dollar rises in value against the Australian dollar, our costs go up but our revenue doesn't = bad times. On the flip side, if we hedge, we would lose any benefit if the Hong Kong dollar falls in value against the Australian dollar. Hedging helps mitigate risk.
Here are my thoughts on hedging:
1. In the short term we can't really hedge as we have no idea what our revenue is going to be like and therefore how much we should hedge. Hopefully this is only temporary and we have a better idea in a few months time following our launch.
2. If the Australian dollar moves in value against other currencies, our competitors will be faced with the same issues as us as very few shoes are made in Australia. If the Australian dollar rises in value we, and our competitors all benefit from higher margins. However this is likely to attract new entrants to the market pushing down prices, so the net effect after a period of time is neutral. If the Australian dollar falls in value against all currencies, we and our competitors face decreasing margins putting pressure on us all to raise prices. If everyone raises their prices then, assuming demand doesn't slacken off too much at the higher prices, the net effect after a period of time is neutral. There are a ton of assumptions in here, including that our competitors don't hedge, which I think is likely given the shoe retailing market is made up of many small players.
3. We don't know which currencies our competitors buy their shoes in and the theory in point 2 above doesn't hold if most of our competitors buy in Chinese yuan or US dollars. If they do then we're at risk if the Hong Kong dollar appreciates in value against the Australian dollar, but the Chinese yuan and US dollar don't.
4. Hedging costs money. I'm guessing in the order of a couple of percent of the value hedged?
Conclusion - Given these points I think we need to:
1. Launch so we get an understanding of what our sales are going to be.
2. Find out what currency our competitors buy their shoes in.
3. Consider some hedging as the market movements described in point 2 above take time to happen. Hedging might help us in the short term until the market adjusts.
Thanks for bringing this up and making us think this through Matt! I'd love to hear yours and anyone else's thoughts on hedging as it's a long way from our area of expertise. (Feel free to comment below).