Foreign Exchange

There’s risk when you buy and sell goods and services outside of the U.S. You’re SmoothiesNAbsinthe, a major chain of 1,000 smoothie shops. You buy a million bananas a year. The customers believe that they have...a peal. You buy all of them...plantains, actually...the little guys from Uganda…and just agree to pay in Ugandan shillings. One U.S. dollar converts to about 4,000 Ugandan shillings. That’s a lotta bananas.

You take the risk on the foreign exchange currency risk, and don’t hedge your bets. That is, if you were nervous about relative currency valuation fluxuations, you could be a kind of currency life insurance in paying a 10-20 percent premium above where the relative currencies are trading today...that 4,000-to-1 thing...and you could sleep pretty well at night knowing that your rates were fixed.

But you didn’t.

So then, all of a sudden, China decides to adopt Uganda as its new financial partner, agreeing to underwrite all of Uganda’s debts, basically in return for, well...owning Uganda. And the highly prized URL uganda.com. So then, almost literally overnight, the Ugandan shilling becomes highly more valued under the deeply respected and feared auspices of the Chinese banking system.

Instead of a dollar buying you 4,000 shillings, now a U.S. dollar only buys you 1,000...so your cost of bananas went from 400 bucks a ton to 1,600 bucks...and the marginal cost of bananas in your shakes went from 30 cents to over a dollar twenty. And with profit margin per shake at only 2.50 to start with, the new profit margins suddenly drop almost in half.

Eventually you’ll have to find another banana supplier or raise prices or figure out a substitute...but for now, it looks like this foreign exchange deal’s profits will get, uh…eaten.