Question

2. How do exchange rates affect international financial management decisions?

Answer 1

Exchange rate fluctuations affect revenues, costs and valuation of firms

If you are exporting goods out of country or offering services internationally, you are going to be happier when your currency is weaker (making the exchange rate higher). That way, when you get paid in another currency, let’s say US Dollars, you will have more local currency in your pocket. The opposite applies if you are an importer.

Timing of foreign purchases: Running a business that just has a standing order to purchase or export a certain amount of units of product each month. If this is the case, make the order more dynamic so you get the most out of the possible rate fluctuations.

Paying foreign salaries-business owners who started their businesses in one country and opened a remote office abroad. If they pay foreign salaries and send funds on a certain date each month, choosing the day money is sent each month,can save thousands of Dollars.

Currency fluctuations can affect your margins on goods sold.

Business essentially have four options to counteract their currency exposure:

The simplest approach is just to monitor the changes.Another option is to lock into an exchange rate for a fixed period of time by setting up a forward contract. A third option is to hedge against this exposure via derivatives. Although this may be the most complicated option, it can be effective in limiting exposure to volatility. Finally, firms can choose to manage their currency exposure through business practices.