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Billabong Case Study

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1. Explain why exchange rates have been so volatile in recent years/ What are the implications of this volatility for companies like Billabong?

There are a large number of influences at work in the foreign exchange markets. The most obvious are shifts in fundamental demand for a currency that reflects the outlook for the economy. For example, if Australia is exporting more goods and services, foreign buyers will need to buy Australian dollars to pay for them. That will put upward pressure on the value of the currency. All else being equal, countries that run large trade surpluses – meaning that they export more than they import – should see their currencies rise over time. However, the value of the dollar is also driven by speculation as traders seek to profit from the underlying trends of the movement of one currency against another.
A significant amount of activity in foreign exchange markets consists of borrowing in currencies where interest rates are low and investing in ones with higher rates. In periods of low volatility, such as from 2002 to 2006, this method can be very profitable. However, in recent years a higher-yielding currency is potentially seen as a sign that problems are building up in the economy.
In periods of high volatility such as now, speculating directly on currency movements is usually considered too risky for private investors as it can easily lead to large losses. Buying overseas-listed shares or investing in funds that hold foreign assets is the most obvious way in which it is likely an investor will become exposed to foreign exchange risk. In the case of Billabong as a globally renowned company, this means that much of its overseas demand for its products can be unpredictable to a large degree and hence present challenges for the company in maintaining competitiveness in this environment.

2. What does a falling Australian…...

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