Business Implications of Exchange Rate Changes

Why would you want to make a long-term investment for your company in the chosen country?

When an input (machinery, components, capital, labor, etc.) is denominated in a foreign currency, the risk exists that an unfavorable exchange rate movement will increase the cost of doing business. When the products are priced and sold in a foreign currency, an adverse exchange rate movement will make the product appear more expensive to consumers, decreasing demand or forcing the company to reduce its own profit margin to maintain lower price levels. For companies with integrated international business systems, an exchange rate shock can literally force them out of business, with their operations experiencing pressures from both cost and profit centers.

It is also important to note that quite a number of multinational corporations have in the past setup operations in developing nations in an attempt to make cost savings especially in terms of labor and production costs. With a growing

During the second half of 1997, currencies and stock market prices plunged in value across Southeast Asia, beginning in

Effects of Currency Fluctuations on American Express international operations. In the 2015 annual report, American Express reported a loss of $545 million because of foreign currency translation adjustments. American Express has employees in over 40 countries. Management has an accurate number of employees in each country, the budget for employee expenses, and the exchange rate for that country. However, the unknown factor is unexpected fluctuations in exchange rates. A business cannot afford to withhold payroll because of exchange rate fluctuations. In India, American Express is rated as number two in best places to work. This indicates the company is consistently meeting payroll obligations. American Express has been exchanging currency since the 1800s and provides an international payment service, FXIP to the world.

dollars, since shareholders want to have returns on U.S. currency. Several factors distinguished financial management by domestic firms from multinational corporations by different currency, and different economic and legal structures. It’s important to understand direct quotation, and indirect quotation which might affect the company’s overall revenue. Since, the currency of the dollar changes, it might require higher rates on foreign projects. We need to take into consideration political risk and exchange rate risk. Since, government actions can decrease the value of the investment. Or generate losses due to fluctuations in the value of the

ANSWER: Multinational corporations’ efforts to source inputs and locate production anywhere where costs are lower and profits are higher.

There would be no significant impact on any economies as long as exchange rates are flexible.

A business decision to move production overseas may reduce staff costs. It will therefore benefit owners but work against the interest of existing staff, who may lose their jobs, customer may also suffer if they receive a poorer service.

Risk is an inherent aspect of every business activity and its effective management can determine the success or failure of a company. Companies dealing with foreign currencies are at a risk of significant losses caused by fluctuations in the exchange rates. The American Institute for Foreign Study (AIFS) operates in more than one currency and this exposes it to currency risks. The company incurs its expenses in dollars but receives its revenue in other currencies and, therefore, adverse fluctuations might result in huge losses to the company. The company employs a hedging strategy as its core approach to risk management. Hedging involves entering into contracts that lock up exchange rates in future so that a company obtains its revenues or makes payments in constant exchange rates despite fluctuations. By hedging its currency risks, AIFS is able to avoid losses that result from huge fluctuations in currency exchange rates. However, the company has to pay a commission for the hedging as compensation to entities that assume this risk. AIFS has employed two primary methods of hedging: currency forward contracts and currency options. Forward contracts are agreements that give an entity a right to exchange specified amounts of one currency for another at pre-determined exchange rates in a future date. On the other hand, options give the holder a right but not an obligation to engage in

For a floating exchange rate, the total balance of payments is always zero. Saying that the current account is in balance then also implies financial account balance.

However, speculation can only be expected to smooth exchange rate movements if underlying economic processes are relatively stable. If there is a great deal of uncertainty over future government actions and their economic impact, expectations will not be strongly held. Thus expectations can change dramatically from day- to-day, leading to rapidly fluctuating exchange rates.

Miller, K. D., & Reuer, J. J. (1998). Firm Strategy and Economic Exposure to Foreign Exchange Rate Movements. Journal of International Business Studies, 29(3), 493-513.

The growth in the developing nation’s economy over the past 3 decades was heavily dependent on its low cost advantage compared to those of other countries. During this period of growth, foreign companies flocked to China to set up production facilities and factories to capitalize on this cost advantage. Raw materials are shipped to China, where factory workers build the final products and export them out to various countries (Wassener 2014).

Introduction ..................................................................... 1 Problems in the Beginning .......................................... 1 Finance ...................................................................... 1 Management ............................................................ 2 Marketing .................................................................. 3 Technology ............................................................... 4 Problems Now