Exposure to FX Rate Risk - A Qualitative Analysis of German Fair Trade Importers

Abstract

The aim of this paper is to investigate the exposure of Fair Trade (FT) importers in Germany, operating based on the principles of the World Fair Trade Organization (WFTO), to foreign exchange (FX) rate risk in the light of the current depreciation of the Euro. The ongoing high volatility of the Euro exchange rate strongly affects Fair Trade companies that import products mostly from developing countries and sell them in the European market. <br> Previous research about hedging foreign exchange risk exposure focused either on large international corporations or on small and medium sized enterprises (SMEs) in terms of their derivative use. However, these studies insufficiently discuss the exposure of micro and small Fair Trade businesses. Their distinctive feature is rooted in the Fair Trade principles such as non-interest bearing pre-financing, lack of pass-through possibilities and Minimum Price. <br> Using a four-stage qualitative research approach, we gained a unique data set conducting semi-structured interviews with CEOs of Fair Trade companies and financial institutions. Thereby, we can make statements about how micro, small and medium sized Fair Trade importers perceive and manage their FX exposure. Furthermore, we investigated how the demand arising from this exposure can be hedged using derivates. <br> Our results suggest that vast majority of Fair Trade importers perceive FX volatility to have a strong impact on their businesses. Moreover, most Fair Trade importers do not know how to deal with currency volatility. We find indication that Fair Trade Importers cannot draw on financial instruments provided by banks since their specific derivative demand is mostly below the invisible line of €50,000. This situation is condensed in the FX exposure framework. Our findings indicate that a possible solution can be achieved by pooling a number of smaller hedging demands into larger tradable batches.