Posted by: changholt | January 15, 2013

Why does currency matter?

In international trade a good business deal could lose money and a bad deal could make money just on the currency fluctuation. So no matter how well you plan if you not plan for currency fluctuations you may lose money or your business.

What should the currency be of any given transaction?

a. Exporter country’s currency?
b. Importer country’s currency?
c. Third country’s currency?

All of these could be could choices. You as the exporter (or manufacturer) need to ascertain how much risk you are taking on? Or how much risk you are giving your customer (you may lose the deal) due to currency fluctuations.

Therefore you need to understand the risks you are taking in dealing with currencies of different nations. You must understand ways currency fluctuations can be predicted and how you and your clients can protect themselves from currency valuation swings that may adversely affect either party.

If you the exporter/manufacturer chose only to use your currency the exchange rate fluctuation risk is zero! However, now the exchange rate risks are borne by your client/importer. The latter could cost you a deal. Who want to take on unnecessary risks?
Therefore how you manage your currency transaction exposure is a critical part of international business. Here are a few items you should consider:

1. You have two choices with international currency transaction risk/exposure:
a. Retain it (accept the risk)
b. Hedge it (reduce the risk)
2. The choice you take is based on the amount of risk you can absorb. You should consider:
a. Your company’s forecast of exchange rate
b. The size of your firm
c. Your ability to weather risk
d. Size of invoice
e. Your company’s sophistication in international finance

In sum, it usually better to hedge foreign exchange risk. However you still need to get the deal. Remember, the client’s/importer’s currency is generally preferred by importers, and you can always hedge any currency exchange risk.

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