Foreign Exchange Rates
Foreign exchange rates are a huge factor in the success of any business, large or small.
If your business imports or exports goods or services, owns assets overseas, or regularly makes overseas payments, foreign currency exchange rates will directly affect your profit levels. But even if you have no immediate contact with businesses or customers overseas, and don’t accept any foreign currency payments, changes in foreign exchange rates will still affect your business.
Why should this be?
Obviously, foreign money exchange rates affect your profit levels when it comes to trading abroad. Foreign currency is traded in pairs – for example you may sell pounds sterling and buy the equivalent amount in euros. If the pound is strong, you will get more euros. If the foreign currency exchange rate weakens, you will get fewer euros.
That much is clear. But, even if you don’t physically need to buy or sell foreign currency, the foreign money exchange rate still affects your customers, and they in turn affect your profit levels.
Some of your customers understand foreign exchange rates. They know that, if the pound is strong against the euro, they may be able to get more for their money if they sell pounds and buy euros, and trade abroad instead. And that is bad news for you.
So, you need to guard against this risk caused by changing foreign exchange rates – ‘economic foreign exchange exposure’. It is difficult for businesses to protect themselves against economic exposure, as they have so little control over it. Nevertheless, an understanding of foreign currency exchange rates can help. Corporate FX will help you decide whether you need to reduce your prices temporarily in order to become more competitive, and safeguard profits for the long term.
For importers and exporters, who buy and sell currency in order to trade abroad, foreign exchange rate changes have a direct effect. These businesses need to guard against ‘transactional exposure’.
Businesses or individuals who own assets abroad may need to convert the value of their assets into pounds sterling. The foreign currency exchange rate at a given moment will determine that value. This type of risk is known as ‘translation exposure’.