The strength of the Australian Dollar has received much media attention lately, and while the average Aussie may be celebrating savings on eBay and Amazon, there are significant risks which may impact upon the sports, events and venues industries. The Financial Risk of Currency Rate Change
A key financial risk concerns dramatic movements of currency.
For example: a promotions company who wants to contract a US artist to play a series of concerts in Australia in nine months time, would most likely be denominated in US dollars.
With the dollar past parity, the promoter may decide that the act will tour profitably. However, if the Australian dollar weakens dramatically – as it did when it fell 35% in three months in 2008 – the promoters will effectively need to pay the artist much more than they had planned. The venture may end up making a significant loss even if all other figure estimates were correct.
Strong Currency = Weak Tourism
As the Australian dollar strengthens against foreign currencies, tourism numbers tend to drop, as it becomes relatively more expensive for tourists to buy Australian dollars. Similarly, it becomes relatively cheaper for Australians to travel internationally.
The immediate result is that any business which relies in part on international tourism or domestic holiday-makers, such as zoos and recreation parks, may find themselves with diminished revenues.
Mitigating against Currency Rate Risk
Any organisation whose revenue is significantly correlated with the movements of currency rates should consider applying some risk mitigation strategies.
In our example above, shrewd promoters may decide to buy foreign exchange derivatives as a hedge – this effectively acts as a form of insurance for unforeseen currency movements. From a risk management perspective, this is a risk transfer method.
While currency issues may not significantly impact upon all businesses, a thorough risk assessment should include risks related to financial loss due to currency exchange rate swings.