Small businesses such as Alliance Design Concepts are great examples that shows a fluctuation in the foreign currency exchange rate that can impact the profitability of the company. Small businesses have to understand the risk when they doing business on an international level. Very often the exchange rate value will not work in their favor. In case with Alliance, since they were using an international supplier, they needed to make sure they have converted all the cost of equipment from USD to CAD. The exchange rate fluctuation caused a direct 8.2 percent decrease in the pre-tax margin on the equipment for Alliance. In the same way Macdonald’s sales in Europe increased in 2011, however the yearly profit went down as a result of the weakening euro. As as result of even small fluctuations in the exchange rate, it can cost companies to lose in the return on exchange. In my opinion, small business such as independent travel agencies can fell the most impact when of the exchange rate floating. Travelers from and to foreign countries have to convert money to that particular country’s currency so they can have enough funds to visit places, stay at the hotel, and do other things. When the USD appreciates against euro or other major currency, American tourist will be able to enjoy more, because the exchange rate will be in favor to them. On the negative side, if you are a traveler to the USA, then most likely the travel agencies will be experiencing the lower number of foreign travelers due to the fluctuation in the exchange rate. When companies such an Alliance Design Concepts doing business with suppliers or customers that operates in different countries, its very important to understand and share the foreign exchange risk with others i...
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...f you know that currency that you are dealing with fluctuates by about 3 percent per year to USD, then you could easily charge 3 percent more for the product or services you offer in that country, in the USA particular to my example. By charging 3 percent more, you will get a baseline price if the currency will decline by 3 percent, and if the currency declines less than 3 percent ,the company will get an extra income. No one knows the best practices on how to mitigate the exchange risk, but still every company has some strategies that they can implement to decrease the risk and increase the profit. Overall, the foreign currency exchange risk is just something that every business should be able to deal with in a global economy, as long as they are not afraid to accept strategies that sometimes will take a little longer to see the results or they can failed in fact.
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Sukirno (2004) states that foreign exchange rates or foreign exchange rate is the price or value of a country's currency is expressed in another country's currency, or it can also be interpreted as the amount of domestic currency needed to get one unit of foreign currency. Meanwhile, according to Mankiw (2013) the exchange rate between two countries is a rate agreed resident of both countries for mutual trade with one another. Economists distinguish between the exchange rate being two (Mankiw, 2013), namely:
Foreign exchange is a commodity, and its price fluctuates based on supply and demand, like any commodity. This is not the place for a complete discussion of supply and demand as relates to foreign exchange, but for our purposes, we will assume that supply of and demand for a country’s currency moves along with the supply of or demand for that country’s products or the products of its trading partners. For example, if one country buys many more goods from its neighbor than its neighbor buys from it, the balance of payments at the end of the year will cause its neighbor’s currency to be in great demand, thereby driving its price up.
Globalization has led to an increase in multinational companies that produce different types of goods. Although these multinational corporations have been reaping substantial benefits as a result of market expansion, they face a greater risk of losing their international revenues as a result of fluctuations in exchange rates. Changes in the exchange rate between the countries expose the home company to various risks such as transaction exposure, translation, and economic exposure. As a result, the value of the firm is affected by fluctuation in the exchange rate. To effectively manage the exposures, companies use various hedging strategies such as the use of forwards contracts.
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
In addition, the future exchange rate can lead to decrease Tiffany 's profits because the yen is thought to be overvalued in comparison to the dollar. These risks are fairly serious because the extreme volatility in the exchange rate creates significant uncertainty in what the future exchange rate and profits will be.
These companies include: Bixler, Italy who operates next generation telecommunications services based in IP networks, CMG (Computer Management Group) in London and does consulting, telecommunications and computing, Hutchison Global Communications Limited in Hong Kong they are also a private company that specializes in global communications and MEASAT Broadcast Network Systems Sdn. Bhd. in Malaysia, the company operates as a media and entertainment company and are mainly in Malaysia etc. While most foreign investors prefer to invest in dollar or euro denominated countries due risks associated with foreign currency, Microsoft has done an outstanding job allocating resources internationally making them this successful. In Chapter 7 of Mike Peng’s Global Business book there are strategies for financial companies to benefit from foreign exchange. For example: Strategic Hedging, this means companies can spread out their activities in different currency zones. This offset currency losses in certain areas through gains of other areas. Therefore, creating currency diversification. (Peng,
In addition, value of exchange rate will affect the cost of imports and exports. MNCs involved in many import and export activities, volatility of exchange rate will bring the positive or negative effects to the firms. In the exchange rate, the relationship of currency between the countries is opposite. For example, domestic currency appreciation causes the import cheaper. On the other hand, foreign currency appreciation causes the import expensive.
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
Factors that Determine the Currency Exchange Rates Exchange rate is often referred to as the nominal exchange rate. It is defined as the rate at which one currency can be converted, or 'exchanged', into another currency. For example, the pound is currently worth about 1.824 US dollars. One pound can be converted into 1.824 dollars. This is the exchange rate between the pound and the dollar.
Buy and sell in same currency to minimise foreign exchange risk. Alternatively, the buyer can hedge against foreign exchange risk by entering a forward or option foreign exchange contract with a bank.
Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.
Foreign exchange translation exposure results when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial reporting. Foreign exchange translation risk arises from investments in the following countries: United States, United Kingdom, Switzerland, Hungary, Turkey, Poland, Australia, New Zealand, India and Egypt. The functional currencies of the subsidiaries in these countries are different from the Euro
A currency depreciation will have both short and long term effects. In the short term, the exchange rate will cause a country’s exports to appear cheaper, thus also increasing the demand for those exports. Likewise, it will also make imports more expensive and reduce the demand. In the long term, the depreciation can lead to increased assumed demand, pushing economic growth. Higher assumed demand can also lead to higher real GDP and potentially inflation. All of this has the potential to impact the current account.
4. To what extent, if any, have you and your co-managers adapted your company's strategy to take shifting exchange rates into account? In other words, have you undertaken any actions to try to (a) minimize the impact of adverse shifts in exchange rates or (b) capitalize on the impact of favorable exchange rate shifts? Why or why not?
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...