Mr Van Vliet is CFO of Blue Electronics B.V.. Blue Electronics operates internationally. The company imports specialised electronics from China and sells them. Both in and outside Europe.
Mr Van Vliet wants to optimise cash flows. Moreover, he wants to hedge the currency risk on four orders from China. The total purchase value is $ 800.000,- (US) dollars. The exact delivery dates are unknown, but they will be delivered over the course of the year.
Blue Electronics expects to make between three and seven payments (including a payment deposit)over a period of seven months, for a total amount of $ 800.000,- Mr Van Vliet wants to protect this amount against an increase in dollar value and secure the profit margins of Blue Electronics. To do this, he wants to fix the dollar price for the coming seven months. He also wants flexibility, as he is uncertain about the timing and amount of the individual payments.
During these seven months, Blue Electronics can execute dollar payments at any moment, for a total value up to $ 800.000,- This gives Blue Electronics a guaranteed purchase price.
After a month, Mr Van Vliet completes the first payment of $ 150.000,- for the first delivery from China. The second and third payments are completed after three months for a total amount of $ 550.000,-. The final delivery takes place after six months. Blue Electronics completes the final payment of $ 100.000,-.
The dollar price increased in value over those six months. One dollar now costs € 0.90. Blue Electronics completed all payments at the favourable dollar price of € 0.85. Instead of paying € 720.000,- ($ 800.000 *0.90), Blue Electronics payed € 680.000,- ($ 800.000 *0,85). The flexible forward has saved the company € 40.000,-.
The dollar price decreased in value over those six months. One dollar is now just € 0.80. Blue Electronics unfortunately does not benefit from the cheaper dollar using the Flexible Forward. Instead of € 640.000,- ($ 800.000 *0.80), Blue Electronics payed € 680.000,- ($ 800.000 *0.85).