NZ Importer Secures Costs with Forward Contracts

About the client

A New Zealand importer focused on the seasonal trade of exotic fruits sourced from South-East Asia and India. The company is committed to bringing high-quality, unique fruit varieties to the New Zealand market, catering to a growing consumer demand for diverse produce. With a robust supply chain and established relationships with growers in the region, the company aims to ensure reliable imports while navigating the challenges of currency fluctuations.

Industry

Food Importation, Exotic Fruit Trading

Location

New Zealand, sourcing from South-East Asia and India

Strategy Used

Forward contract

Background

A New Zealand importer specializes in the seasonal business of importing exotic fruits from South-East Asia and India. Anticipating invoices totaling USD 2,500,000 for fruit imports from South-East Asia in 6 months’ time, the current favorable NZD to USD exchange rate of 0.6500 poses a dilemma. There’s a concern that the NZD might weaken against the USD, potentially increasing the cost of imports.

Strategy: Forward contract

To hedge against this risk, the client opts to enter into a Forward contract with Corporate Alliance FX. By securing the current exchange rate of 0.6500 NZD into USD for the settlement date in 6 months, this strategic move shields against adverse currency movements, providing invaluable financial predictability.

Analysis and Benefits

Cost Certainty: The Forward contract enables accurate cost forecasting for importing exotic fruits, regardless of potential exchange rate fluctuations. This precision facilitates effective budgeting and prudent financial planning.

Risk Mitigation: Locking in the exchange rate now proactively mitigates the risk of NZD weakening against the USD in the future. This shields the business from unexpected increases in import costs, ensuring operational stability and profitability.

Payment Obligations: With the Forward contract, the client gains confidence in fulfilling payment obligations for fruit imports at the agreed-upon rate, irrespective of currency market fluctuations. This certainty eliminates uncertainty and fosters trust in business transactions.

Outcomes

As anticipated, the NZD gradually weakens against the USD leading up to the settlement date.

Without Forward Contract:

The NZD depreciates to 0.6400 against the USD, resulting in higher costs of imports.

Initial anticipated cost: USD 2,500,000
Conversion rate at settlement: 0.6400 NZD/USD
Actual cost without Forward Contract: USD 2,500,000 * 0.6400 = USD 1,600,000
Additional expenditure: USD 2,500,000 – USD 1,600,000 = USD 900,000

With Forward Contract:

By locking in the rate at 0.6500 NZD/USD, the importer secures their costs, spending USD 1,625,000 in total.

Conversion rate locked in with Forward Contract: 0.6500 NZD/USD
Actual cost with Forward Contract: USD 2,500,000 * 0.6500 = USD 1,625,000

By utilizing the Forward contract, the importer saved USD 275,000 compared to not having the contract in place. This strategic move highlights the effectiveness of proactive risk management in mitigating currency fluctuations and maintaining business continuity.

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Solution

Payments

Finance

Corporate Alliance Group Pty Ltd (ABN: 58 167 119 226) trading as Corporate Alliance FX (“CAFX”) holds an Australian Financial Services License (AFSL No: 523351) issued by the Australian Securities and Investments Commission, and is registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) as an independent remittance dealer (Registration No – IND100697688-001).

Corporate Alliance Payments Pty Ltd (ABN: 66 650 245 382) trading as CAPAY is an Authorised Representative (001295931) of Corporate Alliance Group Pty Ltd (ABN 58 167 119 226), and is registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) as a remittance dealer (Registration No IND100792739-001), and a Remittance Network Provider (RNP) (Registration No. RNP100792739-001).

Corporate Alliance Pty Ltd (ABN: 51 644 169 148) trading as Corporate Alliance Finance (“CAFIN”) is an Authorised Representative (ASIC AR No. 001297733) of Corporate Alliance Group Pty Ltd (ABN 58 167 119 226), which holds an Australian Financial Services Licence issued by the Australian Securities and Investments Commission (AFSL No: 523351).