How do currency fluctuations affect import/exporters?
Exchange rate volatility can work against an international company if a payment in a foreign currency has to be made at a future date. There is no way to guarantee that the price in the currency market will be the same in the future-it is possible that the price will move against the company, making the payment cost more. On the other hand, the market can also move in a business' favor, making the payment cost less in terms of their home currency.
Generally, firms that export goods to other countries benefit when their home currency depreciates, since their products become cheaper in other countries. Firms that import from other countries benefit when their currency becomes stronger, since it enables them to purchase more.
Some Currencies are More Volatile than Others
Business owners with commercial ties to countries experiencing major changes in their economies are even more vulnerable to currency rate risk. An example of a risky currency is the Japanese Yen. A rocky economic recovery in Japan and Japanese restrictions on capital outflow makes the dollar-yen rate very volatile.
The Volatility Trap
If an export/import company conducts business in a volatile market, it is exposed to a higher degree of currency rate risk. Sudden changes can be disastrous for a company that does not plan ahead by detracting from its bottom line.
Hedging Against Currency Risk to Avoid the Volatility Trap
So how can a business protect against a risky currency? One way is to avoid the risk by minimizing their commercial involvement with countries that have volatile currencies like the Japanese Yen. This is however not a practical solution. Another way is to hedge in the spot currency market by taking a position that effectively neutralizes the volatility in the pair. Learn More