Understanding foreign Exchange Risks.
Fluctuations in currency exchange rates can have significant effects on business costs, asset values, and profitability. Therefore, it is important for managers to be familiar with exchange rates and currency considerations and to understand the risks involved in currency exchange.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
- Competency 4: Assess the feasibility of business operation in other countries.
- Analyze the exchange-rate-based value of selling goods in the United States exported from a different country.
- Explain how changes in the exchange rate would affect profitability for exports from a different country to the United States.
- Identify risks related to changes in the exchange rate from a management perspective.
Given the very wide range of complex topics associated with globalization, the issue of monetary systems might seem small. However, as is readily apparent, it can have a dramatic impact on a company’s operational and financial success, and thus is actually a vital topic.
Consider a U.S. business manager involved with a supplier in Argentina. At present, the inflation rate in the United States is relatively low, while the inflation rate (at least the unofficial and more widely accepted rate) is fairly high. If the U.S. business manager negotiates a contract to purchase products from Argentina in pesos (at prevailing prices in Argentina), the U.S. business will likely be impacted by inflation, since the price paid for the products would increase faster than in the United States. By contrast, if the U.S. business manager negotiates contracts to be paid in U.S. dollars (at prevailing prices in the United States), the U.S. business might be more insulated from Argentina’s inflation. However, the supplier in Argentina might perceive that as unfair, since they could potentially sell their product within Argentina at prices increasing more rapidly.
As a more extreme example, also using Argentina to illustrate the point, Argentina for many years had their peso tied 1:1 to the U.S. dollar. That turned out to be unsustainable (contributing to a financial crisis in Argentina in 2001), and Argentina had to abruptly remove that tie and let the peso float on the international market. That abrupt change caused massive issues for businesses located within Argentina, as well as for foreign companies doing business in Argentina. As an example, depending on how various contracts were set up, some businesses faced an overnight quadrupling of prices.
Complete the following:
- Examine the concept of the exchange rate between the Japanese yen and the U.S. dollar. Choose a Japanese company, such as Toyota, Canon, or Mitsubishi, and identify a strategy that the company might consider to reduce its currency exchange risk associated with Japanese and U.S. currencies.
- Write an analysis in which you include the following:
- Identify the exchange rate of the Japanese yen and the U.S. dollar.
- Discuss the resulting value of selling goods in the United States exported from Japan.
- Explain how weekly changes in the exchange rate would affect profitability for exports from Japan to the United States.
- Identify risks related to changes in the exchange rate from a management perspective.
- Support your analysis with references from the Capella University Library, globalEDGE, or other Internet sources.
