Question

What are the challenges that currency exchange rates pose to doing business in a global market?

How can business use exchange rates to their advantage in conducting business globally?

Answer 1

Introduction: -

With global trade expanding to all parts of the world, it has become increasingly possible for companies to manufacture their products at one place while selling the finished products across the globe.

However, there are constant risks to business such as Market Fluctuations, Regulation issues, Local Taxes, Consumer differences etc. These pose a constant threat to business activities which are run across the globe.

However, companies find their own ways and manners to tackle such situations in real time and have devised numerous plans and strategies which help them in growing despite facing such issues.

Case Specifics: -

The current case, looks around foreign exchange and how its utilization should take place and what are the challenges which companies may face while dealing in the same.

Challenges: -

Foreign exchange refers to the exchange rate in terms of other currencies which our own domestic currency can yield. Usually all currencies across the globe link this to dollar and may compare the same accordingly. For example, 1 dollar yields 76 Rupees at present and the same dollar yields 0.93 euros.

The challenge to business is that foreign exchange rates continuously change over a period of time. When this happens, local profits are lost to conversion. For example, if an American company sells its products in India and earns in Indian Rupee, then in that case with the depreciation of Indian Rupee as compared to dollar the profits for the firm would be lost towards currency conversion.

A detailed example is as follows: -

Consider a company which makes a profit of 1,00,000 rupees in a day. With the present exchange rate of 76, the yield in dollars would be around 1,312.85 $ a day. In months this would equate to around 40,000 USD. Now if the same exchange rate changes to 80, then the yield would be 1250$ a day which would be around 37 thousand USD.

This loss is what the challenge is for business. Due to change in currency rates, the business may suffer huge losses if it invests in areas where the currency rates are fluctuating too high.

How business owners can use exchange rates: -

• The first strategy how a business owner can use exchange rates to their favour is by importing raw materials from countries where their exchange rates are valued higher. This would mean that the raw material imported is off similar quality however, the prices paid may be significantly lesser.

• The second strategy which we may follow is to link the cost of our products with the currency. Meaning that to have a variable price for the products in the short run. This would mean that an average rate of the products can be kept and sold at depending on the weekly or monthly average. This would help us absorb any loss or profit from change in exchange rates respectively.

• The next strategy is to have a pre-decided rate of exchange with any player you deal with. This would take away the blow you may face in case of fluctuations. Many companies put in special clauses in their contracts to enable them to absorb any loss and turn it into a profit for the business.

Please feel free to ask your doubts in the comments section.