Read the attached closing case. It explores the implications of changing currenc

Question

Read the attached closing case. It explores the implications of changing currency values on the profits of Australian retailer Billabong, which relies on the U.S. market for a significant share of its total sales. Discussion of the case can revolve around the following questions. Answer the following questions: 1. Why does a fall in the value of the Australian dollar against the U.S. dollar benefit Billabong? 2. Could the rise in the value of the Australian dollar that occurred in 2009 have been predicted? 3. What might Billabong have done in order to better protect itself against the unanticipated rise in the value of the Australian dollar that occurred in 2009? 4. The Australian dollar continued to rise by another 20 percent against the U.S. dollar in between 2010 and 2012. How would this have affected Billabong? Is there anything that Billabong might have done to limit its long-term economic exposure to changes in the value of the currency in its largest export market? Note: Your work should follow proper APA formatting including 12pt Times New Roman font, 1" margins all around, double-spaced, indented responses, title page, in-text citations, and reference page.

Explanation / Answer

1.

Billabong exports its products in US markets and to great extent it depends on foreign exchange market thus for instance if US dollar gets stronger against Australian dollar then it facilitates it’s product to be less expensive in US which in fact helps to enhance its sales and revenues and vice-versa.

Billabong revenues were determined in terms of Australian dollar against sales affected in US which in fact was calculated in terms of foreign currency depending on the exchange rate. Thus if Australian dollar falls in terms of value against US dollar then the cumulative value of Australia dollar computed in terms of exchange rate determined against US dollar facilitated an overall increase in the earnings of Billabong thus benefitted them a great extent.

2.

Australian economy had headed towards a sudden downturn in 2009 which in fact as per analysts was due to slower than expected economic growth in China. In its quarterly outlook report Australian research firm Access Economics had already cautioned by 2009 a sharp economic downturn which in fact would adversely affect the Australian dollar and interest rates come crashing down.

The report further enumerated that it would be the sharpest deceleration of Australia’s economy and in fact also predicted that the central bank would be forced to cut interest rates from 4.25 to 2.5 percent to stimulate growth. Over a period of time Australian government had enjoyed steady budget surplus but however it would be now under pressure to maintain deficit spending at minimum. However Access Economics predicted that falling product prices would pull business revenues down which in fact would mean less corporate taxes to support federal budget deficits.

3.

In 2009 when Australian dollar came down in value against US dollar Billabong enjoyed from differences in exchange rate values between the two currencies. However Billabong should have accumulated its revenue which was affected due to changes in exchange rates thus facilitating to provide for adverse changes if happened in future.

It’s a general accounting principle thus in 2009 when Australian dollar value increased against US dollar the accounting section would had needed to recomputed facilitating to compensate for the deficit from the reserve profit of changes in exchange rate in 2008. If the reserve profit could not be compensated for the deficit by the changes of the exchange rate of foreign currency only then Billabong should had increased the product prices to compensate for the deficit.

4.

Global brand Billabong was of the view of potential cuts in its profits due to rising Australian dollar that have grind down the immediate value of overseas sales. Furthermore the after-tax revenues had come down sharply by 13 per cent totaling to $153 million due to global financial crisis which impacted to great extent US retail market.

However in US some retailers were discounting products by up to 70 per cent. Mr O'Neill Company CEO said that company had made a conscious decision not to engage in heavy discounting as it would not be in the group's long-term interests as they thought there would be a remarkable change in the way people approach spending in general for all ages.

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