Delta Garments quotes Order A to Northline Apparel in US dollars, but pays its own fabric, labour and overhead costs in its own local currency. The USD price of 3.20 per piece is fixed at order confirmation and does not change. What can change, between confirmation and the day the payment actually arrives, is how many local-currency-units that USD price converts into. If the local currency weakens against the USD, the factory receives more local currency for the same USD price, and its real margin improves. If the local currency strengthens against the USD, the same USD price converts into fewer local-currency-units, and the factory's real margin shrinks, even though nothing about the order itself changed. This lesson mainly teaches the money flow: how a currency move between two fixed dates changes what a fixed USD price is actually worth to the factory.
You need: Order A's own fixed costing (Course 12, Course 1) and the idea that a factory's own local costs and a buyer's own foreign payment can be in two different currencies.
By the end of this lesson you can:
Not covered here: the main ways a factory can reduce this exposure (lesson 6.2), bank guarantees and what they cost to hold (lesson 6.3), and building a complete financial risk sheet for a new order (lesson 6.4).
| Term | Meaning |
|---|---|
| Foreign exchange (FX) risk | The risk that a currency move between two dates changes what a fixed foreign-currency price is worth in the factory's own local currency. |
| Local currency | The currency a factory pays its own costs in and reports its own real profit in. |
| Exchange rate | The number of local-currency-units one unit of a foreign currency (here, one USD) converts into. |
| Real margin | A factory's margin measured in its own local currency, after any currency move is applied to a foreign-currency price. |
| Order confirmation | The date the buyer and factory agree the order's price, quantity and terms; the USD price is fixed from this date. |
| Payment date | The date the factory actually receives and converts the buyer's payment into local currency. |
| Adverse currency move | A change in the exchange rate, between confirmation and payment, that converts the same foreign-currency price into fewer local-currency-units. |
Order A's FOB price of USD 3.20 per piece is fixed the day Northline Apparel and Delta Garments confirm the order. Every cost inside that price, fabric, trims, making, overhead and profit, was calculated in USD terms at confirmation. But Delta Garments pays its own fabric supplier, its own workers and its own landlord in its local currency, not in USD. Between the day the order is confirmed and the day Northline Apparel's payment actually arrives, the exchange rate between the local currency and the USD can move. If it moves adversely, the same fixed USD price converts into fewer local-currency-units than the factory planned for when it built its costing, and the local-currency profit built into that 3.20 shrinks or disappears, even though the buyer still pays exactly 3.20 per piece.
| What can differ | The shapes you will meet | Why it matters to you |
|---|---|---|
| Currency of the sale price | An export order like Order A is priced and paid in USD, a foreign currency to Delta Garments. A domestic sale, like Delta Garments' own sale to Cedar & Co., is priced and paid in the same local currency both sides already use. | An order priced in a foreign currency carries FX risk by definition; a purely domestic order, in one currency on both sides, carries none. |
| Time between confirmation and payment | Order A's own timeline runs 16 weeks from confirmation to shipment, with payment following under whatever terms were agreed (Track 15, Course 1). A short-lead reorder confirmed and paid within days carries far less time for the rate to move. | The longer the gap between confirmation and payment, the more time an exchange rate has to move before the factory actually converts its payment. |
| Direction of the move | An adverse move (the local currency strengthening against the USD) converts the same USD price into fewer local-currency-units. A favourable move (the local currency weakening against the USD) converts it into more. | A factory that only plans for a favourable move is planning for one of two possible outcomes, not managing a real risk. |
| Business model behind the order | An MTO export order like Order A is priced once, at confirmation, against a single quantity and a single payment date. An MTS domestic order, built to the factory's own forecast and sold in local currency, has no foreign-currency price to move at all. | The exposure this lesson teaches applies to priced, foreign-currency orders; it does not apply to a domestic MTS order sold in local currency throughout. |
At order confirmation, the illustrative exchange rate is 30 local-currency-units per USD. Delta Garments built Order A's own costing (fabric 1.15, trims 0.20, making 1.10, overhead 0.49, profit 0.26, all USD per piece) against that rate, expecting its 0.26 USD profit per piece to convert into 7.80 local-currency-units of real profit per piece. By the time Northline Apparel's payment arrives, the illustrative rate has moved adversely by 5%, to 28.50 local-currency-units per USD. The USD price Northline Apparel pays is still exactly 3.20 per piece; nothing in the contract changed. But that 3.20 now converts into fewer local-currency-units than the 96.00 Delta Garments planned for, and the local-currency value of the 0.26 USD profit shrinks with it.
The worked numberThe USD price on Order A's contract is fixed the day it is confirmed, and it stays 3.20 per piece all the way to shipment and payment. A reader who checks only that figure can wrongly conclude nothing about the order's profitability has changed, because the number everyone quotes has not moved. What has moved is the local-currency value of that fixed USD price, the number that actually determines whether Delta Garments' planned profit survives to the day it converts the payment. A factory that only watches the USD price, and never the exchange rate standing behind it, can discover its real margin has shrunk only after the payment has already arrived and been converted.
Delta Garments sells Order A to Northline Apparel for a fixed price in US dollars, but pays its own costs, fabric, wages, rent, in its own local currency. Between the day the order is confirmed and the day the payment actually arrives, the exchange rate between those two currencies can move. If it moves against Delta Garments, the same fixed dollar price turns into fewer local-currency-units than the factory planned for, and its real profit on the order shrinks, even though the buyer paid exactly what was agreed. A sale made and paid entirely in one currency, like a domestic sale, has no such risk at all, because there is no exchange rate standing between the price and the cost.
Three months after Northline Apparel confirmed Order A at the illustrative rate of 30 local-currency-units per USD, Delta Garments' finance team receives Northline Apparel's payment of USD 3.20 per piece across the full 15,000 pieces. By the time the payment is converted, the illustrative exchange rate has moved adversely by 5%, to 28.50.
Here is the note Mona receives from the finance team:
Has Delta Garments been paid correctly, and has its real profit on the order changed? Decide before opening the answer.
Delta Garments has been paid exactly what the contract says, but its real local-currency profit on the order has shrunk. Two facts decide this together.
First, the contract was honoured in full. Northline Apparel paid USD 3.20 per piece for all 15,000 pieces, exactly as confirmed; there is no dispute over the USD amount received.
Second, the exchange rate moved against Delta Garments between confirmation and conversion. The same USD 3.20 that was planned to convert into 96.00 local-currency-units per piece (at the illustrative rate of 30) converted into only 91.20 (at the illustrative rate of 28.50), a shortfall of 4.80 local-currency-units per piece against the plan, well above the 7.80 planned profit per piece.
The lesson is not that Northline Apparel underpaid; it did not. The lesson is that a fixed USD price carries no protection at all against a currency move once it leaves the contract and enters Delta Garments' own accounts.
Framed on Order A's own fixed figures, an illustrative adverse move of 5% in the exchange rate between confirmation and payment costs Delta Garments 4.80 local-currency-units per piece against its own plan, across all 15,000 pieces.
An illustrative move of 5% in the wrong direction removes well over half of Order A's own planned local-currency profit, on an order whose USD price never changed at all.
Open the Financial risk sheet workbook linked below. Its "FX exposure" sheet lists an order's sale currency, cost currency, the illustrative rate at confirmation, and an illustrative adverse move, then calculates the local-currency shortfall this lesson worked through for Order A. Fill in the yellow "Your order" column with your own order's currencies and an illustrative rate you choose for practice, never a real current market rate.
[Download the Financial risk sheet](../../templates/T15-C06-financial-risk-sheet.xlsx)
1. Order A's USD price stays 3.20 per piece from confirmation to payment. What changed to shrink Delta Garments' real profit in this lesson's case?
2. Which of these orders carries foreign exchange risk, as this lesson defines it?
3. A different order is priced in USD at 5,000 pieces x USD 4.00, confirmed at an illustrative rate of 40, converted three months later at an illustrative adverse rate of 38. What is the local-currency shortfall against the plan?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Foreign exchange (FX) risk | مخاطر الصرف الأجنبي (FX) | Risque de change (FX) | Kur riski (FX) | The risk that a currency move between two dates changes what a fixed foreign-currency price is worth in the factory's own local currency. |
| Local currency | العملة المحلية | Monnaie locale | Yerel para birimi | The currency a factory pays its own costs in and reports its own real profit in. |
| Exchange rate | سعر الصرف | Taux de change | Döviz kuru | The number of local-currency-units one unit of a foreign currency (here, one USD) converts into. |
| Real margin | الهامش الحقيقي | Marge réelle | Gerçek marj | A factory's margin measured in its own local currency, after any currency move is applied to a foreign-currency price. |
| Order confirmation | تأكيد الطلبية | Confirmation de commande | Sipariş onayı | The date the buyer and factory agree the order's price, quantity and terms; the USD price is fixed from this date. |
| Payment date | تاريخ الدفع | Date de paiement | Ödeme tarihi | The date the factory actually receives and converts the buyer's payment into local currency. |
| Adverse currency move | تحرك سعر صرف غير مواتٍ | Mouvement de change défavorable | Olumsuz kur hareketi | A change in the exchange rate, between confirmation and payment, that converts the same foreign-currency price into fewer local-currency-units. |
You now know how an adverse currency move between confirmation and payment shrinks Delta Garments' own real margin on Order A, even though the USD price never changed. The next lesson teaches the main ways a factory can reduce this exposure before it becomes a loss. Back to the course map