The exposure that appears on no schedule

A quotation Ardessa did not lose on price

In October Larkmoor comes back for a repeat of CH-7480, in two of the three colours: 26,000 units, same fabric, same construction, delivery in the spring. Ardessa quotes USD 11.85 again, because its cost has not changed.

It does not get the order. Larkmoor places it with Vantorn Textile, in Terenne, at USD 11.00.

Ardessa's merchandising manager runs the number the way anybody would. At the settlement rate of 43.10, the factory's cost on this style is USD 10.69. Matching 11.00 leaves a margin of USD 0.31, which is 2.8% — on a style that needs three colour changeovers and a full fitting cycle. He declines, and he is right.

Then he asks the question that matters. How is Vantorn making money at 11.00 when Ardessa cannot?

Nothing happened to Ardessa. Something happened to Terenne

Vantorn's cost on the same garment was USD 10.60 two years ago. That is higher than Ardessa's. Vantorn has not become more efficient, has not bought better fabric, and has not cut its wages.

The taral has fallen. Two years ago Rhosden Bank's cross rate was 9.20 taral to the dollar. It is now 10.70.

Notice again that one event has two sizes, exactly as in lesson 3. The taral has lost 14.0% of its dollar value. The dollar buys 16.3% more taral. Both describe the same move.

Vantorn's cost base is about 60% in taral. That is a slightly higher local share than Ardessa's, because Terenne spins and weaves more of its own cloth. So a fall of 14.0% in the taral's dollar value cuts Vantorn's dollar cost by 60% of 14.0%, which is 8.4%. USD 10.60 becomes USD 9.71.

Now look at what Vantorn has done with that.

Vantorn cut its dollar price by 7.2%, and is 20% better off in the only currency it actually spends. It did not really make a pricing decision. It passed on a windfall it could afford to pass on. From Larkmoor's side, a supplier simply became cheaper.

Ardessa had zero taral exposure, and lost more to the taral than to the sela

Go back to the exposure schedule in lesson 2. It has three rows. None of them is in taral. Ardessa has never signed a taral contract, never held a taral balance, never invoiced or been invoiced in taral. By every measure a treasury system knows how to take, Ardessa's exposure to Terenne's currency is exactly nothing.

Price the loss anyway.

The repeat was 26,000 units at USD 11.85, a value of USD 308,100. At the 12.60% margin Ardessa costs at, that is about USD 38,821, or roughly 1,673,000 sela of contribution that did not happen.

The measurable loss on LKM-9126 — the one lesson 2 wrote a schedule for, the one a forward could have covered — was 1,239,210 sela. The invisible loss is about 1.35 times the visible one.

This is the difference between two kinds of exposure.

• Transaction exposure is a list of contracted cash flows. It can be hedged.
• Competitive exposure is what exchange rates do to your prices, your volumes and your competitors. It cannot.

There is no instrument for the second kind. A forward obliges you to deliver a currency. You have no taral to deliver and no taral to receive. There is nothing to write a contract about.

What you can do instead is measure it

You cannot hedge competitive exposure. You can stop being surprised by it. That turns out to be worth a great deal, because it changes what you argue about internally.

Ardessa's merchandising manager did one useful thing. He went back through the file and put six quotation rounds against the same competitor into one table, with the exchange rate beside them.

Over the six rounds, the gap moved a full dollar in Vantorn's favour while the dollar gained 1.50 taral. That is roughly USD 0.67 of price gap for every taral of currency move. That slope is now a number Ardessa can carry into a range meeting.

The four responses that are real

There is no instrument, so the responses are commercial and slow.

1. Know your competitors' currencies, and watch them. If half your losses go to one country, that country's exchange rate belongs on the same page as your order book.
2. Compete on the things a currency cannot move. Lead time, approval turnaround, minimum order quantity, the ability to take a late colour change, delivery on time and in full. Track 27 is written from the buyer's chair and is largely a catalogue of these. They are the reasons a buyer pays more, and they are the only defences that hold when a competitor's currency falls 14%.
3. Spread the customers. A factory selling to one market in one currency has concentrated a risk it did not choose.
4. Decide in advance what you will not chase. Ardessa's decision to decline at 11.00 was right. What was missing was a policy saying so before the meeting, so that declining looked like discipline rather than like losing.

What to take away

The currency loss you can measure is the one an instrument exists for, which is why it gets all the attention. The loss that decides whether you get the order at all sits in a competitor's country, appears on no schedule, and is often the larger of the two. You cannot hedge it. You can measure it, name it, and stop mistaking it for a sales failure.