Determinants of Exchange Rates
1. Differentials in Inflation
2. Differentials in Interest Rates
3. Current Account Deficits
4. Public Debt
5. Terms of Trade
6. Political Stability and Economic Performance
Find out more about Determinants of Exchange Rates on investopedia
Changes in currency exchange rates can affect board game publisher in terms of:
- the cost of commissions (artwork, proofreading, manual writing, video, etc.)
- the cost of game production (printing, safety certificates, etc.)
- the cost of shipment from producer to shipping fulfilment partners (fulfilment companies)
- the cost of shipment from shipping fulfilment partners to backers
- marketing costs (banner adverts, reviewers, etc.)
- the cost of purchasing anything in foreign currency
Euroinvestor.com in their article point out: A study by SunGard Data Systems polled 275 US businesses of various sizes. It found that 59 percent of those surveyed had seen a loss or gain of more than five percent as a result of currency fluctuations in the previous year.
“The majority of corporations are in the business of doing business, producing and manufacturing, not hedging currencies,” said Paul Bramwell, a senior vice president of Treasury solutions in Hartford, Connecticut, at the AvantGard unit of SunGard. “A lot of companies were caught unawares by volatility.”
When printing a game in a Chinese company one cannot just pay in American dollars. Chinese companies would prefer to be paid in their currency. As a result, one would have to buy Chinese currency with currency from one’s own country. The same applies to artists, writers, shipping fulfilment partners, etc.
A very general example
I thought of creating a scenario which could be used to illustrate a way in which changes in the currency rate can affect board game projects. This is just an example created for the purposes of this article.
- Let’s say you plan to produce 5,000 games with a Chinese manufacturer. They offer you a price of CNY 66 per game (CNY 330,000 in total for all games). At the time of calculating your budget USD 1 is worth CNY 6.2. So 1 game would cost you about $10.64 (66 divided by 6.2) what makes USD 53,225 (330,000 divided by 6.2) for all your games.
- You have an artist from the EU. He agrees to prepare all the artwork for your game for EUR 11,000. At the time of calculating your budget, EUR 1 is worth USD 0.88. So the entire artwork would cost you USD 9,680 (11,000 x 0.88).
You also have fulfilment companies in the EU, UK.
- You are sending 1,200 games from your EU shipping fulfilment partner to your backers in the EU for EUR 10 per game. At the time of calculating your budget, EUR 1 is worth USD 1.09. So the cost of shipment per unit would be USD 10.9 (EUR 10 x USD 1.09) what makes USD 13,080 in total (1,200 x EUR 10 x 1.09).
- You are sending 300 games from your UK shipping fulfilment partner to your backers in the UK for 6GBP per game. At the time of calculating your budget, GBP 1 is worth USD 1.48. So the cost of shipment per unit would be USD 8.88 (6 x 1.48) what makes USD 2,664 in total (300 x 6 x 1.48).
Please note: In order to show you how changes in the currency rate could affect a Kickstarter project, the above scenario includes only some of the costs to be most likely incurred by the publisher.
Unexpected changes in the scenario:
Now imagine that the U.S. face a cataclysm, start to be involved in a military conflict or that their government decides to print more money to pay off a part of their large debt. The currency exchange rates are affected. Even under normal circumstances rates can change quite a lot! Now it is time to realise that since your Kickstarter campaign has ended and since you have finished calculating your budget the exchange rates in the scenario provided changed a lot:
USD 1 is now worth CNY 5.7
EUR 1 is now worth USD 1.4
GBP 1 is now worth USD 1.8.
Let us see how the above changes would affect the budget calculated before:
- Chinese manufacturer: now it costs USD 57,894 (66 x 5,000 divided by 5.7) in comparison with USD 53,225 from before (USD 4,669 more)
- Artwork: now it costs USD 15,400 (EUR 11,000 x 1.4) in comparison with USD 9,680 from before (USD 5,720 more)
- Shipment of the games from your EU shipping fulfilment partner: now it costs USD 16,800 (1,200 x 10 x 1.4) in comparison with USD 13,080 from before (USD 3,720 more)
- Shipment of the games from your UK shipping fulfilment partner: now it costs USD 3,240 (300 x 6 x 1.8) in comparison with USD 2,664 from before (USD 576 more)
All unexpected changes of currency exchange rates wiped off the profit. In total, the publisher will have to pay USD 17,925 more than he has initially budgeted! It is quite an extreme example but such situation is always possible, and it is better to be prepared for it!
Minimising the risk from your currency exposure:
- monitor the exchange rate changes
- lock into an exchange rate for a fixed period by setting up a forward contract
- produce in the same currency (if you are from the United States, having manufacturer from the US will protect you against the risk)
- open a bank account in other currencies. If you are going to pay an artist from the EU in EUR, open a bank account in EUR. Until your artist finishes the artwork, you can protect your money against any exchange rate changes by sending and keeping it in the EUR currency.
Recently the UK left the European Union
Please, have a look on the United Kingdom's British Pound after leaving the European Union. Sterling reached the lowest against the dollar from 31 years. You can imagine how this change can affect publishers from the UK.
Have you ever won or lost money because of changes in the currency rate? Maybe you have any other good ideas on how to minimise the risk of currency exposure?
References:
http://www.euroinvestor.com/ei-news/2012/07/17/how-exchange-rate-fluctuations-affect-companies/19796
https://research.stlouisfed.org/
http://www.investopedia.com/articles/basics/04/050704.asp
