(MCOM 9) influence of exchange rates on trade and shipping

influence of exchange rates on trade and shipping

what is its impact on import and export competitiveness?

• exchange rates determine the relative cost of goods and services across countries

• when a country’s currency depreciates, its exports become cheaper and more competitive while imports become more expensive, reducing import volumes

• conversely, when a country’s currency appreciates, exports become more expensive and less competitive while imports become cheaper, increasing import volumes

• this directly affects trade volumes, influencing demand for shipping services to move goods internationally

influence of exchange rates on trade and shipping

what is its effect on shipping costs and freight rates?

• many shipping contracts, charter rates, and freight charges are denominated in US dollars or other major currencies

• if the exporter/importer’s local currency depreciates against the dollar, shipping costs in local currency terms increase, impacting overall trade costs

• conversely, currency appreciation can reduce shipping costs in local currency terms

• fluctuating exchange rates introduce uncertainty in shipping costs, influencing contract negotiations and risk management

influence of exchange rates on trade and shipping

what is the influence on trade flows and shipping demand?

• changes in exchange rates influence trade flows

• an appreciated currency encourages imports, leading to more inbound shipping demand

• a depreciated currency encourages exports, increasing outbound shipping demand

• shipping companies and ports adjust operations based on changing trade volumes driven by currency movements

influence of exchange rates on trade and shipping

what is the impact on investment and financing in shipping?

• shipping is capital-intensive; financing often involves international loans

• exchange rate volatility can affect loan repayments and investment returns when currency mismatches occur

• firms may face currency risk if revenues and costs are in different currencies, impacting financial stability and decisions on fleet expansion or route planning

influence of exchange rates on trade and shipping

what is the impact on risk management and contracting?

• exchange rate fluctuations create risk for traders and shipping companies

• parties often use contracts denominated in stable currencies or include currency adjustment clauses e.g. Currency Adjustment Factor (CAF) (C6)

• hedging instruments are used to mitigate exchange rate risk impacting shipping costs and revenues, e.g. forward contracts

what is a forward contract?

a type of financial agreement used to lock in an exchange rate today for a transaction that will occur in the future