To provide an example:
(Simplified, fx forwards not available, all factor costs in local currency)
Eastern block, Romania, post communism, circa 1990:
When I export apparel to the US and receive $1MM from my Client at Citibank, NY I would request a fraction to be transferred home to pay wages and supplier bills. Upon transfer, the bank would convert those $300k dollars into the local currency (umm eh, which devalues with a rate of 10% per quarter).
The remainder I leave at the US bank account and possibly put into a bond portfolio, depending on what the rep at the bank sells me. In the coming months I repeat the process and after a time a decent quantity of dollars invested into Tbills, CPs Treasuries...has built up.
This is good. If the government of my beloved homecountry decided to expropriate me they won´t find significant money at home. Or if they decided to devalue the currency or freeze conversions then I would just shrug.
Euro Zone, Romania, circa 2010:
When I export apparel to the US and receive now $2MM from my Client at Citibank, NY I would request all transferred home and then some. Upon transfer, the bank would convert those dollars into the EUR which is now also the local currency.
Because I know that I export apparel every month now, I asked the bank to lend me and pre-sell the dollars for the next 36 months of production, the Euros to be sent to Romania. The interest for that is already lower than what I receive at home.
If my supplier stops ordering (I would fire some people) or paying me the US bank has a problem. As the dollar devalues on a daily basis I just shrug. |
