The overall foreign exchange position of a co. may be complex as illustrated in the case of BA. BA does business in approx. 140 foreign currencies, which account for approx. 60% of group revenue & 40% of operating expenses (the rest being UK sterling). The group generates a surplus in most of these currencies. The main exceptions are the US dollar & the pound sterling in which BA has a deficit, arising from capital expenditure on fuel, which is payable in US dollars, & the majority of staff costs, central overheads & other leasing costs, which are payable in pound sterling.
BA consequently has a highly complex foreign exchange position, but it is imperative to the profitability of such a co. that this exposure to foreign exchange rate movements is recognized & managed appropriately. In all cases, risk attributed to foreign exchange rate movements arises out of uncertainty about the future exchange rate between two currencies. The risk would be minimized if it were possible to predict future rate movements. Unfortunately, however, it is not possible to do so with any degree of accuracy, & for a co. to try to do so can be financially dangerous. Therefore, given that foreign exchange rates cannot be predicted, another option might be to pass on to the customer the effects of any adverse movements in exchange rates &, hence, the co. would incur no impact. In most cases, however, the highly competitive nature of international business prevents higher costs being passed on to the customer in this way.
The broad spectrum of currencies in the business, many of which are linked in their movements to the US dollar & the pound sterling, give BA a measure of protection against exchange rate movements & reduces the overall sensitivity of the co.’s results to exchange rate fluctuations. Nonetheless, BA can experience adverse or beneficial effects. For example, if the pound sterling weakened against the US dollar &