Globalization has largely been a blessing to business owners, as it has introduced them to an international business landscape they otherwise would never have been exposed to. Because of this interconnectedness, international businesses have access to a much wider customer base, as well as the opportunity to compare goods and services from around the world. Yet, these same businesses must now also deal with the complexities associated with different global markets.
With international businesses and markets being as connected as they are, understanding foreign currency exchange rates and their implications for international business is essential. As such, we will be discussing what exchange rates are, how they affect international businesses, and how companies can make the most of exchange rate fluctuations.
What are Currency Exchange Rates?
Understanding foreign currency exchange rates is essential to doing business in the international market. Quite simply, a currency exchange rate is a measure of the value of one currency compared to the value of another. For example, if the exchange rate between the Canadian Dollar (CAD) and the U.S. Dollar (USD) is said to be 1 to 0.75, it means one Canadian dollar is worth 75 cents in U.S. dollars, and vice versa.
The value of a currency is determined based on an assessment of a country’s economy, political situation, international trade, and interest rates, as well as market sentiment. An important thing to note, however, is that exchange rates are not static. They change over time.
Exchange rates are set in the global financial marketplace where banks and other financial institutions trade currencies 24/7. As the factors that determine the value of a currency change, exchange rate fluctuations occur. Exchange rates follow the ebbs and flows of international demand, meaning that rates can fluctuate from minute-to-minute or day-to-day. Some shifts may be subtle and others may result in substantial changes. It is important for international businesses to keep an eye on these currency fluctuations so they may make sound business decisions.
The Ways Exchange Rates Impact International Businesses
Foreign exchange rates and foreign currency conversion fees can affect an international business in a number of ways. Here are the top three impacts:
Profit and revenue: Fluctuations in exchange rates can have a sizable impact on the revenues and profitability of businesses. Exporters, for instance, will find their revenues decrease if the value of their domestic currency rises against the one used by their foreign customers. Conversely, importers will experience an increase in costs should the value of their domestic currency decrease against the foreign currency they rely on to purchase goods.
Competitive standing: A strong domestic currency can make products prohibitively expensive for overseas customers and thus reduce a business’s chance of success in those markets. On the other hand, a weak domestic currency can make those same products more accessible, giving a business an advantage over its international competitors.
Cash flow: Exchange rate fluctuations can present a unique issue for businesses in terms of cash flow. For instance, if a company has borrowed a sizable amount of capital in a foreign currency, its debt will increase if the value of its domestic currency decreases in comparison to the foreign currency.
How to Manage the Impact of Changing Exchange Rates
There are several strategies businesses can employ to mitigate exchange rate risk and make the most of fluctuations across different financial markets:
Compare suppliers: If the domestic currency of a business that uses international suppliers weakens, their imports become more expensive. To remedy this, businesses can switch to domestic suppliers or suppliers where the country’s currency offers a more favourable exchange rate. Inversely, as a business’ home currency strengthens, they can look to negotiate more favourable terms by leveraging the strengthening exchange rate.
Spot contracts: Spot contract money transfers offer businesses a great way to save on their currency exchange costs. They allow a business to pause a money transfer until a desired foreign exchange rate is achieved and avoid having to pay out at unfavourable rates. This process might take some time, but in the long run it can save businesses considerable money and protect them from poor market performance.
Forward contracts: A forward contract allows a business to lock in an exchange rate for a future transaction, so they know exactly how much funds they will receive at the time of completion. This eliminates the possibility of the expected income being reduced by unfavourable exchange rate movements in the intervening period between agreeing to a transaction and actually receiving payment.
CanAm Gives You Access to the Best Exchange Rates on the Market
If you’re a business owner looking to successfully navigate the foreign currency market and use exchange rates to your advantage, CanAm Currency Exchange’s business services in Windsor and throughout the rest of Canada can help.
With the access we provide to the best rates on the market, along with our service offering which includes hedging strategy advising, USD/CAD market analysis, forward contracts, spot trades and more, CanAm has solidified itself as one of Canada’s top currency exchange companies, known for helping businesses and individuals make the most of their money. Contact us today for more information.