Australia is negotiating to sell a surplus frigate to Thailand. Negotiated price is either A$ 100 million or US$ 52 million. Today's exchange rate is 0.5200. The ship is to be supplied and paid for in one year's time.

Australia opts for payment in US$. Why?

They convert the US$ to A$ using a forward exchange contract, at a rate of 0.5075 (see note below). In one year's time Australia therefore receive A$ 102,463,000 for the ship.

Thus Australia has gained an additional A$ 2,463,000 on the contract without any net increase in foreign exchange exposures, even though they opted for US$ in the contract. These funds are now available to be spent on other projects.

Note on forward exchange contract rates.
These are not forecast rates. They are calculated from the current exchange rate and the interest rates of the two currencies involved. Forward exchange contracts are offered by financial institutions and have very transparent pricing.

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