Free Essay: Business and Exchange Rate Changes

Published: 2022-04-19
Free Essay: Business and Exchange Rate Changes
Type of paper:  Essay
Categories:  Finance Business
Pages: 7
Wordcount: 1897 words
16 min read

The business repercussions of exchange rate changes for a multi-national company based in the UK depends on several factors. When the value of the pound depreciates, the effect depends typically on the demands elasticity. If for example, the companies sell goods that are price inelastic, the reduction involved in their foreign currency will have slightly increased demand. If the exports have a sensitive rate, there will be a higher percentage rise in demand. Elshandidy and Neri, (2015) argue that goods made in the UK progressively price inelastic hence after a decrease there is customarily a relatively minor rise in demand. In 2009/2010 there arose a considerable decline in the pound. The recession in the global economy led to a decrease in demand for UK exports despite having lower prices. If a UK based company imports raw materials to sell domestically, there is a considerable probability that it will lose from depreciation. If the company imports a minor percentage of the raw materials from overseas and decides to sell them to Europe, it is more likely that the company will benefit from the depreciation. An increase in the value of the pound driven by the rise in productivity of the UK labor results into multi-national companies absorbing the pound because it's stronger and much stable.

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The pound can rise driven by the speculation or weakness of other nations, causing other companies to be uncompetitive mainly because of the increase in value is not related to the rise in production and competitiveness. A problem of depreciation is that it leads to increase in exchange rates., if it does result, companies face costs like uncertainty. Most of the companies use fixed contracts to purchase imported raw materials. Epstein and Buhovac, (2014) assert that it means that temporary fluctuations in the foreign exchange rate will have a little effect. The fixed contracts assist in reducing the uncertainty around foreign exchange rate movements. British companies have choices; they can lower the European price which leads to an increased quantity of sales. It's a wise decision for exporters to cut the European cost, make more sales or choose to keep the price same and create a significant profit margin. Another disadvantage of depreciation is that the companies based in the UK that purchase imports will experience an increase in prices of ordering the raw materials. In the long run, a depreciation causes a reduction in incentives meant for exports to reduce the costs. Weir, Jones, and Wright (2015) postulate that a decrease in domestic exchange rate improves numerous accounts to balance payments, which includes international investment position. The effect on the business balance is an essential factor in the current balance of accounts is not clear (Saghir & Aston 2017). Trade balance worsens when the value of exports decreases and imports increase. Demand for imports can reduce if the relative prices change. Impacts like increased investment due to relative competitiveness, are to be considered.

Depreciation allows a natural increase in their profitability, and a result there are fewer incentives to reduce costs and increase productivity. According to Judge (2015) an upsurge in the value of the pound leads to more expensive exports which lead to a decrease in demand for UK products. It also leads to cheaper imports. Adding to the rising costs, a reduction in value of the pound presents some manufacturers with opportunities because when the currency depreciates exporters have two options (Sekaran & Bougie, 2016). That is leaving their prices unchanged regarding foreign money, or they can reduce their costs in the importing country by changing the exchange rate. It thus means maintaining the amount of the sterling to be more competitive globally with a goal of boosting the volume of sales. There can be situations where competitive gains from the depreciation of the currency can be shared amongst the exporting manufacturer and the country that is importing (Alhadab & Tahat 2016). It mostly happens when the country that is importing is more sensitive to the price and where locally produced alternatives are available to the imported goods. Sekaran and Bougi (2016) say if the costs of exports in the manufacturing sector increase regarding sterling but certainly not in foreign currency terms, then the turnover for British companies will rise. If the price of the foreign currency is to increase, provided that the demand response far from British good is not strong the turnover regarding sterling will be expected to rise.

According to Global research that has been conducted, 5% of SMEs intend to start exporting at some point in the next half-decade, leaving the UK in the bottom European nations fixed by a percentage of SMEs exporting. A lot of this hesitance to exporting is directly a result of doubt stemming from the effect and problems that FX brings to businesses. Overcoming this hesitation with a self-assurance that is the key to success. For the UK to hold its position as an open, global and progressive nation, SMEs should approach foreign exchange markets with more confidence. More than half of all SMEs experience an increase in profits as a direct outcome of exporting, which amounts to an average of PS287,000 of extra revenue which is received per year. The rewards are evidently out there, with an informed, reactive strategy which tackles foreign exchange markets.

The most successful Companies in the UK operate in a progressive international workplace. Continued hesitation is surrounding Greece's future in the Eurozone; companies are fighting to be competitive in the most significant export market in the UK. When the value of the currency fluctuates, the main difficulties for exporters rises when they buy in a currency that is relatively of high valuation. Any strong drive influencing the pound or dollar in any direction should have substantial consequences for profit margins (Alhadab & Tahat 2016). To eliminate this variable, companies ought to try and match the currency that is purchasing and selling. In case a company has a substantial profit of revenue in euros, it is logical to balance it with the same standard of products and services purchased in euros. McLeay and Thomas (2016) argue that by taking this move, businesses can decrease the outcome of fluctuations The profit margins will be protected and the prices will remain proportional to the final rate, regardless of whether the euro declines alongside the pound. An alternative key that can be applied is called hedging (Elshandidy & Neri 2015). Hedging aims at reducing the risk that develops from the future movements exchange rates. It is a two-way risk because the exchange rates can move adversely.

The above scenario involves companies with significant goods spending in areas like plastics, fuel or metals to get a percentage of the necessities through futures, with a goal of exploiting the resources when the price of the market has risen. The same approach is applied in currency hedging to guard a company against future hostile currency inflations. Choudhry and According to Jayasekera, (2015) the strategy carries additional risks if the price of the commodities decreases or currencies takes a wrong track. There are other numerous strategies which can be applied to the chain of supply to manage hostile currency movements and to gain from the advantageous ones. First is determining the actual outcomes of the currency swing on Chain of supply. Although companies can be based in individual countries, get the effects of the currency swing, there is a probability that a section of the cost is also bared by another currency. Obtaining from a Swiss dealer is obviously costly in the climate. On more in-depth examination, the company might realize that its dealer is gaining a share of its raw materials from a European country and in return making payments in euros (Jayasekera 2015). Knowing this gives the businesses room to renegotiate prices and guard its profit margin.

Improved understanding of the origin of costs in the supply chain leads to more significant agility. Creating a relationship with a dealer who operates in several international places means that a company can appeal for the movement of manufacturing from a site where the costs are high, to a base where the prices are competitive. Christopher (2016) advance that if an appropriate multinational dealer cannot be found, companies can opt for a dual-sourcing tactic by involving two diverse supply partners, whereby one is within and the other one outside of the country (Tori & Onaran 2015). When strong relationships are created, and the companies are confident that the vendors can offer quality products, the volume of orders can be switched amidst the two vendors depending on who will present the best regarding value, as dictated by the fluctuating exchange rates. Coping strategies set aside, companies should also aim at grasping the opportunities offered by currency fluctuations. Leigh and Li (2015) hypothesize that a fragile euro decrease the cost of goods from Britain to enterprises found in the European markets, a strong American currency and Swiss franc boost the appeal of Britain and European imports in America and Switzerland.

Increased attention on companies' expansion in the said regions prove beneficial and provides companies with an additional gainful course to market. With Greece still hesitant to pledge to a debt decrease programme and numerous EU states struggling to reinforce their economic prospects post-recession, it seems a declining euro is constant. But then if Greece opts to leave EU, its impact on the euro in the medium term is not satisfied. UK exporters should work to reinforce the agility of the supply chain and exploit cost-modeling methods to remain competitive. If a company depends on exports, it then means that reduction in the exchange rate increases profitability (Leigh & Li 2015). A depreciation in exchange rate leads to cheaper exports to foreign buyers. Singh, Darwish, and Potocnik (2016) contend that the company can make more sales or opt to have a more considerable profit margin. If the company imports raw materials, a reduction will raise the costs of production. Transferring money is simple while spot contracts can be a fast, easy and effective way of moving your assets from one currency the another. It thus introduces a component of risk to the business as there's no way of guessing what the exchange rate is going to be on your transfers. So how can one know what their profit margins will be? With some businesses, applying hedging tactics or long-term forwards can trim the risk, and more complex payment methods can be suited. A spot transaction is perhaps the most straightforward way to transfer funds across borders. Making inquiries from currency specialists will help one to receive a rate quote which allows moving currency in one's preference. Guariglia, Spaliara, and Tsoukas, (2016) postulate that for someone to secure a rate when they are not ready, they can opt for a forward contract which fixes a rate for a specific date to come. Forward agreements help people to plan and protects them in case the prices will move against them later.

Businesses have choices to counter with their exchange disclosure. Gregg (2015) says the modest strategy is to observer changes which is the best option in the case where companies don't think they are at a higher risk of exchange rates. The other option is looking for an exchange rate for a fixed time. When the exposure estimates are right, it becomes an approach, which is beneficial (Bradbury & Pluckthun, 2015). Some companies buy currency in advance when they confirm that they will get massive purchases and concerned with volatility. Caglayan an...

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