The Time Pattern of Economic Exposure
Application American Filmmakers Suffer When the Euro Slumps
According to a story in the Wall Street Journal (May 19, 2000, p. B1), “The euro’s plunge against the dollar is casting a pall over this year’s Cannes Film Festival, forcing European distributors to curtail their purchases of American films and triggering concessions by U.S. producers of a sort once unheard of in this glitzy resort.” The euro’s decline by 24% against the dollar is a problem for European distributors because the international movie business is priced almost exclusively in dollars; it is a problem for U.S. producers because Europe is such a big market for American films. Before a film goes into production, a studio will usually “presell” the foreign rights to distributors and use these presale revenues to finance the film’s production. The presale of rights to continental European distribution often accounts for about a third of a film’s budget. The rise in the value of the dollar has hurt the prices that U.S. producers can get for these rights. At the same time, the higher euro prices for these rights has caused European distributors to seek better financing terms, such as stretching out payment for their acquired rights. Although some U.S. producers have talked about switching to pricing their rights in euros, the problem of a fallen euro would still remain: If the euro price is set at a level that yields the same dollar price, European distributors will face the same higher cost; if it is set at the same euro price as in the past, the U.S. producer will receive fewer dollars.
Application European Manufacturers Suffer When the Euro Soars
At the beginning of 2002, the euro was about $0.86. By mid-2003, it had soared to $1.15, a rise of more than 33%. European manufacturers suffered a profit squeeze on their exports as well as on goods competing against American imports. Consider, for example, the problems facing Head NV, the Dutch sporting-goods maker. The immediate impact of euro appreciation is to make dollar sales less valuable when converted into euros. For example, a tennis racket it might sell in the United States for $50 would bring back €58.14 when the euro was at $0.86 (50/0.86) but would translate into only €43.48 at an exchange rate of $1.15 (50/1.15). With Head’s costs set in euros, the result of euro appreciation is severe margin pressure on its U.S. exports. If Head decides to raise its dollar prices to improve its euro profit margin, it will lose export sales. European companies also face greater competitive pressure in their home markets as well as in third-country markets from U.S. companies selling in those markets. The reason: Given the large jump in the euro’s value, U.S. exporters can offer foreign customers lower prices expressed in euros, while still maintaining or improving their dollar profit margins.