Business Implications of Exchange Rate Changes

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Business Implications of Exchange-Rate Changes

Marketing Decisions

Production Decisions

Financial Decisions

Table of Contents 1 2 3 4 5 6

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Introduction ........................................................................................................... 1 Marketing Decisions ............................................................................................. 2 Production Decisions ........................................................................................... 3 Financial Decisions ............................................................................................... 5 Conclusion and Recommendations .................................................................... 6 Bibliography ......................................................................................................... III

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Introduction

Who could imagine not to travel in 2013 or to eat any fruit during winter time? The worldwide trade plays a significant role for all economies involved, especially at a time that is characterized by increasing globalization and integration of markets. Despite all benefits of trading, its risks must also be considered in order to reveal any trade-restrictive effects and possibly eliminate or reduce these. (Beck, 2009) In this global economy goods and services are imported and exported between countries with different currencies. For this purpose exchange rates, the amount at which one currency is traded for the other country’s currency, are used to complete the transaction. The collapse of the fixed exchange rate system of Bretton Woods in the early 1970s laid to the transition from fixed to flexible exchange rates. This means that currency exchange rates change every day depending on the forces of supply and demand for money. Therefore, in addition to the already existing foreign trade risks of the fixed exchange rate system, economic subjects face fluctuating exchange rate conditions. In fact exchange rate changes can influence companies directly or indirectly. A direct relevance results from international economic activities and dealings in foreign currencies. Exchange rate fluctuations have instead an indirect influence on the competitive situation between domestic and international competitors. (Krugman and Obstfeld, 2009) The exchange rate changes affect businesses at operating strategies and translated overseas profits as well. This work will outline the impacts these exchange rate changes have on functional decisions, which managers have to cope with. The main body identifies and analysis the relation between exchange rate changes and the important functional operational areas of marketing, production and finance. To conclude recommendations will be made.

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Marketing Decisions

Exchange rates highly impact on marketing decisions as fluctuations can influence national and international demand for a firm’s product. Marketing managers have therefore constantly to keep an eye on them in order to be aware of changes and react cautiously. Exchange rates can as well affect the tourism industry, which makes part of the service industry. How weak or strong the national currency importing or exporting matters when compared to the country’s currency the company is trading with. In the case that the country’s currency strengthens, exporters would suffer problems in price competitiveness overseas, because the customer would have to pay more for the same quantity of a product they were used to pay before. Hence, the customer would look for less expensive alternatives and exports for the company with the stronger currency would slow down. In this case exporters have to reconsider the selling price abroad. To remain competitive marketing managers could decide to cut export prices, save money by reducing employment levels and decrease output. By these actions the company with a strong currency adapts its marketing activities in order to...
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