How the foreign exchange market influences business and organizational decisions
An exchange rate mechanism is a tool that countries use to manage their currencies’ strengths. Most central banks use ERM as the monetary policy of their country’s economies. It is essential to ensure that domestic currency has strong controls for it to stimulate trade through domestic currency management, particularly with respect to international currencies (Palma-Ruiz, 2020). The ERM helps the central banks to influence the prices of the domestic currency against those of the foreign exchange markets (Narayanan & Odeh, 2020). In addition, the mechanism also allows the central banks to adjust the peg of the currency to exert a material effect on the exports and imports of a country on top of attracting foreign direct investment and foreign portfolio investments (Jebran, 2018). The ERM plays a critical role in ensuring that a country’s exchange rate remains stable, as well as controlling the vitality of the currency rate market.
Businesses that either depend on imports or exports of raw materials and final products are the most affected by the foreign exchange market. A change in the rate of foreign exchange will directly affect a business that sells its products overseas. If the business submits its invoices in foreign currency and the exchange rates change before receiving the money, the payment would be less than was anticipated (García-Meca et al., 2017). On the other hand, issuing invoices in local currencies means that the prices will not be competitive, which carries the risk of losing the market share to foreign competitors that do not include foreign transactional changes.
Similarly, a business that procures its raw materials from foreign countries will be vulnerable to exchange rate fluctuations. For instance, if the local currency loses its value, the business will be forced to pay more for the same amount of goods before the currency value deteriorates.
It is also possible for a business to be affected by currency exchange even if it does not buy or sell overseas. A change in exchange rates will sometimes lead to fuel price hikes. This will necessitate transport companies to increase the cost of transportation, a cost that is often transferred to businesses. The volatility of exchange rates affects competition as well. When the local currency depreciates, the importation of goods becomes more expensive (Bose, 2018). As a result, a business reduces its import volumes. This will benefit domestic companies, which source their products locally.
The risks involved with foreign exchange and its impacts on different organizations
The following are the risks involved in foreign exchange.
Foreign exchange markets as a viable method for financing corporate restructuring
If an organization opts to carry out an internal restructuring, its processes, ownership, operations, or even departments may change with a view to making the business become more profitable and integrated. Some of the costs associated with restructuring include reducing or eliminating product or service lines, canceling contracts, eliminating divisions, and writing off assets (S.Mahtani, 2018). Others are closing facilities and relocating employees, entering a new market, adding products or services, training new employees, and buying property results in extra costs as well.
Both the currencies of the target company and the acquiring company must be involved in the process of the transaction. The target company’s currency will be appreciated and attain a higher cost as compared to that of the acquisition (Jebran, 2018). However, this only takes place if the transaction is executed using cash payments.
It is important to consider the effects of foreign exchange exposure if organizations have foreign exchange exposure. This means that a business whose annual revenue is $5 million could not have the same amount as its impact. The real amount will depend on the volatility of the market. A worst-case scenario is that a £5 million company’s bottom line could be impacted by an approximate average of £1.25 million (Cyrino et al. 2017). This is a demonstration that the volatility of the foreign exchange market significantly depends on the currency used. Thus, it is safe to conclude that the foreign exchange market is a viable method for financing corporate restructuring, but this depends on the prevailing exchange rates.
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