In our worldwide economy, there is no one immune from the fluctuations of global markets and currencies. The age old adage ‘When America sneezes, Europe catches a cold’ – signaling that European markets were closely tied and dependent on the US economy is true to some extent today. However, the US is just as susceptible to the knock on effects of financial troubles in Europe, and both are intricately linked to markets in Asia, South America and the rest of the world.
As well as impacting on the value shares and currency investments, changes in the value of currencies can impact businesses at a grassroots level.
Close attention to the financial news will enable a company to concentrate their focus on areas of the world which are beneficial for trading and to adjust prices both on imports and exports according to changes in currency value.
Knowing What to Look For
Depending on your business, there will be a number of factors which impact your approach to currency rate fluctuations. If you sell abroad and receive payment in a foreign currency you may actually benefit from receiving payments in a stronger currency than your own. For example, an Italian small business owner who keeps their savings in euros will benefit from selling to the US or UK where the currency is stronger if they receive payment is US dollars or Sterling. This is simply because when the money is converted into Euros there will be more of it if the US dollar or Sterling is strong. Yet if that Italian small business owner is selling to a country where the currency is weaker, they risk losing money. To mitigate against this, they may wish to raise their price, being careful not to lose trade.
Companies who import will benefit from the currency they are buying from having a weaker currency than they do as this will enable more produce to be bought at a cheaper price. If the rate of exchange is not in your favor you may wish to negotiate a lower price.
Often a company will have to deal with more than one foreign country. Meaning that it may have to be attentive to the sometimes contrary fluctuations or more than one economy. For this reason, it pays to have a strategy in place.
How to Make the Exchange Rate Work for You
It may also be helpful to look at past fluctuations, how they impacted your business and how they may be better managed in the future. In this way, a business can prepare for seasonal fluctuation patterns, allowing to fix exchange rates ahead of difficult periods in which the exchange rate is not in your company’s favor.
There are two basic ways to do this: a currency forward contract and a currency forward option. The former allows a currency buyer to pay a deposit to fix a currency rate for purchase at a specified future date. The latter allows a currency buyer to pay a deposit to have the option to either buy a currency at today’s rate at a given date in the future, or to buy at the actual future exchange rate if that is preferable. Currency forward options require lower deposits than currency forward contracts. In both cases the options give the buyer the possibility to commit to the purchase of goods or services whilst avoiding the risk inherent in foreign exchanges as a result of currency fluctuations.