A country’s currency depreciation takes place when the value of the currency decreases in value as compared to other countries. The depreciation in the value of the currency may either be good or bad for the businesses that exist in that particular country. The small businesses that majorly sale and buy goods from foreign countries are the ones that get affected the most by currency fluctuations. The nature of how the businesses gets affected all depends with the type of transactions. The exchange rate between two different countries is the price at which the foreign currencies exchange for one U.S dollar. The rate at which the U.S dollar exchanges with different countries across the world varied from one nation to the other. Moreover, the exchange rate is never at a constant rate and it keeps fluctuating ona daily basis. The exchange rate between the dollar and other currencies either rise or falls depending on the strength of the dollar. If the value of the dollar depreciates relative to the other currencies then exchange rate between the currencies rises. On the other hand, if the value of the dollar of the dollar rises relative to the other currencies then the exchange rate will most definitely drop. When the exchangerates increase then it means that the local businesses find it more expensive to convert the dollar into foreign currency. On the other hand, it becomes much cheaper for the foreign businesses to convert their money to dollar.
Depreciation of the currency also has an effect on the exports especially for the small businesses that sale their products to the foreign parties. If the customer’s currency converts to more U.S dollars then it may probably be an advantage to them. For instance, if a U.S company makes exports to foreign countries that convert to high dollars, then the customers stand to benefit. Additionally, the U.S Company may also stand to benefit in the transaction from the payments made in the foreign currency. In the event that the company converts the money into U.S dollars then chances are high that the money will be more because of the high exchange rate.
Depreciation of a currency also has an immense effect on the imports made by the companies that are run in the United States. However, the rate at which the transaction is affected will depend on the currency that the company uses in making transactions with the suppliers. If for instance a company based in the United States makes payments to its suppliers in U.S dollars then there will be no need for conversion of the currency. For such a case the company will not lose value for its currency, and can therefore maintain its profits. On the other hand, a business will stand to lose if they have to pay their suppliers in foreign currency. The business will lose because of the conversion rates from dollar to the foreign currency.
An example of a company that has experienced changes in profits as a result of the changes in exchange rates is Starbucks, a company dealing in coffee merchandising. Starbucks Company is known for sourcing for its beans (used for making coffee) from foreign countries. The prices of the beans keep on changing in the international market based on the exchange rates that exist in the market. During periods when the dollar weakens against other foreign currencies such as the euro, it becomes expensive to import the beans from Europe. An increase in the prices means that the company’s profits also diminishes thereby affecting the company’s operations. Starbucks is forced to spend more dollars in purchasing the beans from the international market while at the same time maintaining the coffee prices within America. Similarly, the amount of wages paid to the employees cannot be reduced because of a change in the exchange rate. The most probable situation that the organization resorts to during such difficult financial times is to cut off the number of employees in order to be able to operate within their financial budgets.
Another example is McDonalds that sales its products in Europe had its sales increase in the year 2011. On the contrary, the amount of profits that were made by the company during that same year dropped significantly because of the weakening of the euro (EuroInvestor). The value of the dollar dropped as a result of the gain that wasmade by the U.S dollar. In the event that the dollar keeps appreciating, the company may still find its profits diminishing. McDonalds majorly does its business operations in the overseas markets and that is why its profit margins will always get affected by the changes in exchange rate systems. For McDonald’s, the best option would be to take part in hedging of their funds so that the institution does not get affected so much when the rates changes.
One of the options that can be picked by the two set of companies discussed above is that they can keep an eye on the exchange rates so that they are not caught off-guard with the fluctuations in the rates. Second option is that he companies can decide to lock them in a fixed exchange rate for a given fixed period through setting up forward contracts. Locking in fixed rates is considered the best option because in most cases the exposure estimates are always near the correct value. Alternatively, Starbucks can decide to purchase the foreign currencies in advance in the event that they expect a fluctuation in the exchange rates (EuroInvestor). A prior purchase of the foreign currencies prevents the company from making financial losses during an economic volatility. Order Unique Answer Now