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A US importer who owes and Belgian company 500,000 Euros payable in 30 days from today expects that the US Dollar will weaken during this period. What would you advise the importer to do? What would happen if the imported took your advice yet instead of the dollar weakening, the dollar actually strengthened?

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Answer 1

My advice to the importer would be to have the maximum profit that can be made by the situation. For having this, it is important for the importer to have a higher profit margin so that he can pay the dues to the Belgian Company which has to be paid within 30 days. This is a common fact that the financial market is very volatile in nature and things do change in a quick time thus the main focus of the importer should be primarily on earning a greater extent of profit in the pace of waiting for the dollar to weaken. The term weak and strong currency is quite confusing for most of the individuals as many believe that for the domestic economy the best thing is to have an appreciating currency of the home country. Similarly, if the importer will continue to wait for having the weak Dollar and in fact, it turns out to be stronger, then it will have a negative impact on the sentiment of the importer.

If the above stated advise is followed by the importer, and he tries to maximize the profit margin and cover the difference in the money he has to pay when the dollar is weak and the money to be paid when the dollar is strong, he will be able to accommodate any major change in the value of Dollar by earning greater extent of profit. If there will be an increased supply of Euro, this will lower the exchange value of Dollar One cannot predict what is going to happen in the currency market in next day, so importer need not take the risk and wait for the market to go up or down for 30 days. In fact, there might be a situation that he may have to pay more after 30 days than at present. Thus he must focus only on increased profit margin to recover this difference.