FORWARD EXCHANGE

Dominion, Volume 28, Issue 112, 5 February 1935, Page 12

FORWARD EXCHANGE

Operations in New Zealand BENEFITS TO TRADERS Dealings in forward exchange are now being made by the Bank of New South Wales in New Zealand. At this time, when endeavours are being made to establish new markets for the Dominion’s primary products in foreign countries, the operation of a forward exchange market should be of considerable value to both exporters and importers. As a result of the extreme fluctuations in the rates of exchange which took place after the war, forward exchange came into prominence. Now almost every country has facilities for forward dealings, aiid the system goes far to solve the traders" problems as to the fluctuations of exchange and gives general confidence and security to those firms which enter into contracts overseas. In New Zealand, where we have a comparatively large external trade, the rate of exchange is not as important to a merchant as its stability. This is only too well known to importers, who, during the past few years, have experienced, the effects of movements in unstable currencies. Owing to adverse fluctuations in the exchange of exportng countries, merchants, when meeting their commitments, have found themselves derived of anticipated profits. This .goes to show that these variations introduce greater risks and uncertainty to the business community to the detriment of the country as a whole.

The means used by merchants in most countries in alleviating this condition of uncertainty has been found by transferring the risk from their shoulders to those of the. dealers in forward exchange. For example, a merchant in New Zealand when placing an order for a shipment of merchandise from Canada to the value of, say, 1090 dollars, can now arrange a rate of exchange on the day he places his order. That is to say, he, can contract to buy 1000 dollars for delivery on arrival of his shipment. This enables him tq know exactly what the shipment will cost him; and he is able to quote a firm price to his customers before the goods are shipped, and thus preserve his margin of profit. Alternatively, an importer can cover his exchange commitments at any time, In the case where he accepts an after-sight foreign currency draft, he can fix the conversion rate of exchange on the date of acceptance, and this rate will hold good until the date of maturity. This enables him to cast his goods accurately and eliminates any risk of exchange fluctuations. Forward exchange is as helpful to the exporter as to the importer. With a forward exchange market now operating in New Zealand, an exporter of primary produce can protect himself against fluctuations in exchange rates by selling forward exchange at an agreed rate. As foreign firms prefer to purchase our produce in terms of their local currency, this facility should tend to stimulate exports,"as in the past exporters have been wary of selling produce in terms, of foreign currencies. For example, in a case where an American firm offers to buy butter on the basis of dollars per cwt., an exporter can immediately arrange a forward dollar rate which enables him’ to operate as though the quotation had been received in New Zealand currency, and all risks of exchange fluctuations ere eliminated. An eminent authority states: ‘Die nature of forward exchange dealings is not generally understood, and they appear too speculative to the ordinary man. But for merchants who buy and sell goods at a pricc'expressed in an overseas currency it should be part of the normal routine of prudent business to hedge these indirect exchange commitments , by a transaction Tn forward exchange.”