Foreign currency deposits are held by different countries in their national banks. They are the assets of the government which are held in hard currencies such as sterling, euro, dollar and yen. These currencies are used to protect the country against economic crisis and depreciation of currency (Timothy, 2009, p230). Everyday exchange rates are important because they determine how much money is required to buy goods from abroad.
When a currency depreciates it results to difficulty economy planning and weak economy. On the other hand if a country’s currency is strong, then the goods and services become very expensive in the global market which leads to loss competitiveness.
The movement of foreign exchange has a great impact on the company’s returns. International companies see shifts in their profitability because foreign exchange rates can make the currency held locally to be more valuable.
Local companies are also affected because changing foreign exchange rates may alter the cost of materials and also affect the company’s ability to sell their products in the other countries at prices which are competitive (Christian, 209, p107).
Companies most use derivative securities like forwards, options and futures to mitigate or hedge arising risk from movement of the exchange rate. Fund managers and investors also use these tools for speculation with the hope of earning profits from exchange rate fluctuations.
In STMicro company change of foreign exchange rate had some impacts because when the United State dollar was stronger than the Euro the company gained some advantage since its products were competitive.
The company combined the strong dollar with the weaker Euro in its operations by denominating seventy percent cost in euros and pricing semiconductors in United State dollar which made the company earn a lot of profits (Francesca, 2003, p119). On the other hand by the euro getting stronger than the United State dollar, the company’s profit reduced since its products in the foreign markets were expensive thus losing competitiveness.
Change of the foreign exchange can have an effect on the financial decision making of STMicro Company or any other company where the company can decide to sell its products internationally in a weaker currency in order to make the products decision making. The best way of management is preplanning response to movement in markets which are volatile in order to dispense emotions and rely on careful planning. This pre planning will help the company achieve best results by eliminating all panic factors. Due to change of foreign exchange companies con also decide to use risk management as a tool of management in order to maximize revenue, minimize risk and stabilize future margins.
The AutoZone Company which wants to expand its market need to be aware that change of the foreign exchange can affect the business ether positively or negatively. The company needs to use the weaker currency to make its products competitive in the foreign market (Togran, 2009, p69). The company can also combine a stronger and weak dollar in its operations so that it will maximize profits from its products sales and at the same time reduce operation cost.
Since some countries currencies are very volatile a company expanding its operations internationally should use a stable currency like the United State dollar or the euro. In order to prevent the company from making financial losses due to change of the exchange rates a company can do hedging through a bank in order to insure against the prices of an item. One of the risks associated with international investing is changes in currency exchange rate which can either reduce or increase the returns.
If the foreign currency weakens compared to the dollar it reduces company investment returns since the earnings are changed it to fewer dollars. On the other hand when the foreign currency is stronger than the dollar it leads to company’s increased investment returns since the earnings are changed in to more dollars. The other risk is dramatic change in market value because stock market experience changes. Investors lose a lot of money by trying to speculate and thus may not succeed in the foreign markets (Michael, 2003, p298).
Lack of adequate information is also a risk associated with foreign investment and thus it may be difficult to get current information about the performance of the foreign exchange. Political and economic events are source of risks related to expansion of market internationally though they also provide diversification. Another risk is reliance on foreign legal remedies where if a company experiences some problems in the foreign country it has to rely on the legal remedies there which may not be favourable for an investor.
Foreign exchange is very important in any country because it helps in import and export activities of the companies of that country and also the government. This article explains the uses of foreign exchange to companies, its business application in STMicro Company and how it affects company’s decision making. The article also look at the factors that a company like AutoZone which want to expand its market should consider and the risks involved in investing in foreign countries.