Amazon Foreign Currency Exchange Rate Risk and Hedging
This paper examines the foreign currency exchange rate risks that Amazon faces as a result of operating in 58 international markets. Because Amazon prices goods in local currencies and reports financial results in US dollars, it is exposed primarily to translational risk — the risk that fluctuations in exchange rates will affect reported profits when foreign-currency results are converted to USD. The paper explores how Amazon's pricing strategy, operating hedges, and geographic diversification work together to reduce this exposure. It also analyzes the impact of USD movements on Amazon's income statement and balance sheet, drawing on data from Amazon's 2019 Annual Report to illustrate how exchange rate volatility, while significant in absolute terms, remains a relatively small component of the company's overall financial picture.
- Introduction: Overview of Amazon's international forex exposure
- Currency Exposure and Pricing Strategy: Local currency pricing and cost-plus strategy across markets
- Contributions to Profit: Foreign revenue and expense figures by major market
- Hedging Approaches: Operating hedges, diversification, and financial instruments
- Impact of USD Changes on Financial Statements: How USD strength affects translated foreign profits
- Conclusions: Assessment of Amazon's overall forex risk management
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What makes this paper effective
- Uses concrete revenue and expense figures from Amazon's 2019 Annual Report to ground abstract concepts in real financial data, giving the analysis credibility and specificity.
- Clearly distinguishes between translational risk and transactional risk — a nuance many undergraduate papers overlook — and connects that distinction directly to Amazon's choice of hedging tactics.
- Moves logically from describing the business structure (pricing, sourcing, market size) to explaining the financial consequences, making the argument easy to follow for readers unfamiliar with forex risk.
Key academic technique demonstrated
The paper demonstrates applied financial analysis: it takes a theoretical framework (types of foreign exchange risk, hedging instruments) and applies it systematically to a real company using publicly available financial disclosures. Rather than simply defining terms, the author tests each concept against Amazon's actual operations, explaining why certain strategies — such as derivatives — are less relevant than operational offsets for a retailer facing primarily translational exposure.
Structure breakdown
The paper opens with an introduction to Amazon's international scale, then details the nature of its currency exposure alongside its pricing strategy. A dedicated section quantifies foreign revenues and costs. The hedging section evaluates three approaches — operating hedges, diversification, and financial instruments — explaining which Amazon uses and why. A short section addresses the directional impact of USD movements before a conclusion synthesizes the findings and evaluates the overall effectiveness of Amazon's approach.
Introduction
Amazon has online retail operations in 58 countries around the world, and these are typically priced in local currency. This has implications for the company's strategies with respect to foreign exchange risk and foreign exchange cash flows. The use of local pricing is aided, however, by the fact that Amazon sources many of its goods at the global level, utilizes local sources, or uses third-party resellers to help with the provision of goods on each national-level site. This paper discusses the international aspect of Amazon's business — both in terms of foreign currency pricing and in terms of how Amazon's foreign currency policies impact its bottom line.
Currency Exposure and Pricing Strategy
Amazon operates in at least 58 different countries around the world, meaning it has exposure to a large number of currencies — fewer than 58 due to the euro — and those transactions ultimately have implications for its bottom line. Amazon notes in its latest annual report that "international activities are significant to our revenues and profits, and we plan to further expand internationally." The typical structure for Amazon's international operations mirrors that of its domestic operations: the company maintains a website or set of websites serving as the main shopping portal, which is then serviced by one or more warehouses from which goods are dispatched. There is typically also a third-party vendor program through which third-party companies offer goods via Amazon without those goods passing through an Amazon warehouse.
Amazon's North America business unit features warehouses in most major cities, and in many cases Amazon has its own couriers for deliveries. In some markets, neither of these conditions holds. Many foreign markets do feature warehouses where Amazon holds inventory for eventual delivery to customers. This inventory holding is typically one of the primary means of exposure to foreign currency risk, along with the eventual sale of that inventory. As an example, Amazon in the UK will purchase goods in dollars, yuan, pounds, or euros, but will always sell in pounds. Where it is possible to purchase in pounds and sell in pounds, there is no foreign exchange rate risk. In Canada, for example, Amazon uses a mix of locally provisioned goods and goods imported through its US parent company and then shipped to Canada, creating both additional costs and foreign exchange rate risk on the sale.
Pricing at Amazon is typically based on cost-plus, while also taking local market conditions into account to some extent. In the highly competitive US market, Amazon leverages its bargaining power to bring prices on products like Amazon Basics down. The transparency of comparing pricing across similar products is also built into the system, giving the marketplace a quasi-auction feel — a vendor can easily see whether its products are priced competitively. Cost-plus remains at the core of the pricing system. Because so many consumers search Amazon first, there is less need for Amazon to weigh market considerations heavily, except for high-volume products sold by major competitors such as Best Buy, Walmart, and Home Depot (Roamy, 2019).
Even in foreign markets, Amazon tends to adopt the same pricing strategy as in the US, and one of its key tools is the use of data. Amazon changes prices on products frequently, based on a broad range of variables including profit margins, inventory levels, competitors' prices, and shopping patterns (Mehta, Detroja & Agashe, 2018). Amazon uses this data for tactics like loss-lead pricing in the hope that consumers will come to view Amazon's prices overall as attractive. The complexity of Amazon's pricing strategy is replicated in other countries, though it works best in markets where sufficient data exists to support solid data-driven decisions. Prices are set in local currency, and the frequent changes may take foreign currency fluctuations into account in some situations.
On its financial statements, Amazon reports in US dollars. Most likely its internal reporting is done by country, first in local currency and then translated to USD.
Contributions to Profit
In the United States, Amazon's annual sales total $193.6 billion. The two largest foreign markets are Germany ($22.2 billion) and the UK ($17.5 billion), with Japan fourth at $16 billion (Statista, 2019). The euro and pound sterling are the respective currencies used for retail sales in Germany and the UK, and are highly likely to be the currencies of choice on the cost side as well, given that these are very large markets where goods sourced for local consumption will almost always be denominated in home currencies. It is possible that for some of Amazon's smaller markets — such as a small European country that sources much of its consumer goods in euros — a currency other than the home one might be used for costs.
Combined, foreign currency operations contribute $280.522 billion to Amazon's revenues and $265.981 billion to its expenses, representing both a substantial top-line and bottom-line impact from foreign currency exchange rates. The impact of exchange rates varies slightly each year, and differs between the revenue and cost sides depending on where and when transactions occur. For example, in 2019 the foreign currency impact was slightly larger on the cost side than on the revenue side. Nevertheless, when considered as a percentage of Amazon's overall scale, the exchange rate effect — $180 million in the most recent year and $226 million the year before — is relatively inconsequential (Amazon 2019 Annual Report).
References
Amazon 2019 Annual Report. Retrieved April 29, 2020 from https://s2.q4cdn.com/299287126/files/doc_financials/2020/ar/2019-Annual-Report.pdf
HowMuch.net (2019). Charting the most powerful reserve currencies in the world. HowMuch.net. Retrieved April 29, 2020 from https://howmuch.net/articles/worlds-top-reserve-currencies-2019
Mehta, N., Detroja, P., & Agashe, A. (2018). Amazon changes prices on its products about every 10 minutes — here's how and why they do it. Business Insider. Retrieved April 29, 2020 from https://www.businessinsider.com/amazon-price-changes-2018-8
Reiff, N. (2020). Hedge. Investopedia. Retrieved April 29, 2020 from https://www.investopedia.com/terms/h/hedge.asp
Roamy (2019). The consequences of Amazon's pricing power. Medium.com. Retrieved April 29, 2020 from https://medium.com/goods-services/https-medium-com-goods-services-amazons-pricing-power-797e28b63fbd
Statista (2019). Annual net sales of Amazon in selected leading markets from 2014 to 2019. Statista. Retrieved April 29, 2020 from https://www.statista.com/statistics/672782/net-sales-of-amazon-leading-markets/
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