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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

U.S importer who owes Belgium company 500000 euros payable in 30 days will try to minimize losses by using the information of dollar weakening or gaining, in the situation what happens is U.S  dollar will become weak in near future so importer has to pay more as euros value of the dollar will weaken and hence importer will try to avoid this situation. in this case I will advise the person to buy euros of 500000 worth by paying dollars and hence gain,   as there is a time of  30 days it means importer has money of at least 500000 euros in dollar terms selling the dollar and buying euros will make gain and hence help in avoiding weakening situation of the dollar  in near future

To understand it first knows about the volatility situation here as the dollar weakens euros have to be paid more and if there is the strengthening of the dollar euros have to be paid less. Now in the first situation euros is strengthening or the dollar is weakening in the near future so buying euros of 500000 will make us secure in the near future as at the time we have 500000 euros in the pocket, now if the second situation if euros falls i.e dollar strengthen then we have already 500000 in euros, we will pay Belgian company 500000 euros but in the case, no gain can be made as the value of the dollar got strengthen against euros and we are having euros in our pocket.

clearly my advice will not make an importer lose any money out of his pocket.

The second piece of advice I can make - lock 500000 euros worth dollar in the forward market in which if there is any volatility in the currency it will not impact by means of a forward contract, the importer will get the amount which is agreed upon in a forward contract. i.e 500000 euros. this helps in saving against the dollar volatility risk.  

By this importer will be secured and he will not be impacted by the volatility of dollar but the gains which can be made by importer if there is any rise in the dollar value will not be gained by the importer.