Question

Boral Ltd produces building and construction materials. It is a major exporter to Europe, where its main competition is from other European companies. All of these companies invoice the products in euros. Is Boral’s transaction exposure likely to be significantly affected if the euro strengthens or weakens? Explain. If the euro weakens for several years, can you think of any change that might occur in the global chemicals market?

Answer 1

Yes, Boral’s transaction exposure will be significantly affected if the euro strengthens or weakens, it should be noted that transaction exposure is a foreign exchange risk that is faced by Boral while it is exporting and the risk arises due to exchange rate fluctuation between dollars and Euro. When the euro strengthens then European customers will be able to buy Boral’s goods with fewer euros and hence Boral will stand to gain. By being able to sell at a lower price in Euro terms it will have a competitive advantage in the market. On the other hand if Euro weakens then the European buyers will have to pay more for Boral’s goods and this will weaken the company’s competitive advantage in the market. It may even lead to loss of market share for Boral.

If the euro weakens for several years then a situation will emerge in which more and more companies in Europe will begin producing construction materials. Customers will avoid buying dollars with weakening euro. This will lead to a situation in which exporters will eventually be priced out of the European market as their competitive position in the market will continue to fall.