Australian Dollar and British Pound

Readers Question:. (i) On 1 March, AUD1 = GBP 0.42. On 1 July, AUD1 = GBP 0.45.
Your company exports native flowers to British florists. You signed a contract on March 1 to sell 10
tonnes of flowers at AUD 385 per tonne, to be delivered on July 1. Explain how the exchange rate
movement between the two dates impacts on the Australian seller.

On 1July the Australian Dollar has appreciated against the British Pound. 1 Australian dollar now gets 0.45 GBP rather than 0.42. This means British companies will have to pay more in Pounds to get the same amount of Australian goods.

For example, in March, the price of buying a tonne of Australian flowers is 385* 0.42 = GBP 161

In July the price of buying the same tonne is 385 * 0.45 = £173

Therefore, the appreciation in the Australian Dollar makes the Australian flowers more expensive for British importers. In this situation Australian exporters may do two things

1. Keep the same price in Australian Dollars, this may lead to a fall in demand by British importers.
2. Try and keep the price for British importers. This means they would have to reduce their profit margins and accept a lower amount of Australian Dollars. If they kept the price £161 then with the new exchange rate the Australian exporters would only receive 161 / 0.45 = 364 Aus Dollars.