Exchange Rates

  • Exchange rates refer to the value of one currency in terms of another. This can influence businesses through affecting import and export costs and, therefore, a firm’s profit margins.
  • Appreciation in exchange rates is when currency becomes more valuable compared to others. This can make imports cheaper, benefiting firms that rely on imported goods or components, but expensive for exporters since goods/services would be costly for foreign customers.
  • Depreciation or devaluation happens when currency value falls in relation to others. This could make imports more expensive, impacting businesses that heavily rely on imported materials, but benefit exporters since goods/services now are cheaper for overseas buyers.
  • Currency volatility tends to create uncertainty, which may disrupt international trade and business planning. Companies may need to focus on hedging options to mitigate risk.
  • Fluctuating exchange rates can impact competitiveness of a firm. If domestic currency is weak, a firm’s products/services can seem attractive to overseas customers due to their relative affordability.
  • Exchange rate considerations also impact on pricing strategies, cost calculations, supply chain management, and overall business decisions.
  • Firms dealing in the international market are exposed to exchange rate risks. They can consider options like forward contracts or options to protect themselves.
  • Understanding economic indicators can help predict exchange rate movements. Indicators would include interest rates, inflation rates, political stability, economic performance, etc.
  • The extent of a firm’s exposure to exchange rate risk can depend on various factors, including the nature of their business, their trading partners, and the markets in which they operate.
  • Long-term sustainability may require firms to consider global diversification to minimise exposure to a single currency’s fluctuations.
  • Exchange rates also affect foreign direct investment (FDI). High exchange rates can deter FDI as it becomes costly to establish operations in that country.