Foreign Exchange Rate ExposureIn many instances, there are very many companies and corporations that are trading with foreign currency. There is a risk that is involved when international companies and organizations go through this route. This is what can be termed as foreign exchange rate exposure. The risk lies heavily on the international firm in instances where the foreign currency used during trading takes a certain turn. This turn may not be beneficial to the firm that is represented at the international level (Myers 1992). The turn could automatically have adverse effects on all the existing set ups in the organizations.
This is one of the main reasons as to why it is encouraged that international companies have set mechanisms to deal with foreign exchange rate exposure. The general capacity of any firm or organization is represented by its ability to remain firmly rooted on the ground. This is as it strives to make the necessary profits that it is required to make. This paper aims to help in the understanding of foreign exchange rate exposure. It will dissect the effects, if any, of the exchange rate of international companies.
This is in line with observations around the different theories and processes (Myers 1992). To be able to fully understand foreign rate exchange exposure, an analogy can be used. If a person is a major shareholder in the Toyota brand in Japan, the Japanese currency will dictate how the business goes. This means that if the Japanese Yen drops, so do the profits that are expected. If it is at an all time high, profits will be accrued from many of the transactions conducted.
The general observations that relate to exchange exposure are of three distinct types. They include the economic, transactional and translation exposures. They all have varied effects on the standing and capacity of the global firms. Economic exposures relate to all the risks that are encountered as a result of trading in known and unknown markets from time to time (Wong 2003). International firms have to transact at each and every step of the way in their host countries. This gives rise to the transactional exposure.
This requires the company to have the ability to maneuver its activities and transactions around the foreign currency. There are also huge accounting risks that are as a result of the general cost of accounting. This are involved with the physical presence of a company in foreign territory trying to operate in their terms. In summary, any international company has to ensure that it has systems in place. The systems should be able to deal with fluctuations on the foreign currency (Myers 1992). This is because this will have obvious effects on the company’s assets, liabilities and the overall general standing of the business.
It would not be fair to say that local companies do not battle with many of the above mentioned issues. They obviously battle with operating, transactional and economic costs. All these are effectively and efficiently coordinated to ensure that the main objective of the local companies is realized. This is with due consideration to expansion, growth and profit making. This will lead to employee satisfaction and low staff turnover (Houston, 1987). The risks that are affiliated to the local companies in terms of exchange rate cannot be compared in any way to the international companies.
This basically means that they are higher when they are compared to each other. There are very many theories that surround foreign rate exchange exposure. This theories all work in a way that actually looks into the issues of international companies and how they deal with the issue of foreign rate exchange.