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For entrepreneurs, changes in exchange rates affect their businesses in two main ways: by changing the cost of supplies that are purchased from a different country, and by changing the attractiveness of their products to overseas customers
Here is a phenomenon every business owner and investor should pay cogent attention to, as it either directly or indirectly impacts every business. An exchange rate is the value of one country’s currency versus the currency of another country. In other words, exchange rates are the prices of foreign currency that an amount of one currency can buy.
Business owners and investors who offer or purchase values (goods and services) abroad are an example of those directly impacted when the exchange rate is on the high side, either positively or negatively. The implication is that, when bills or invoices are issued using the foreign currency which has a greater exchange value, less money would be received for the value you have offered and at some point, if persistent, efficiency can be lost in the market as per competition with foreign competitors, as those competitors are not affected by exchange rates.
Subsequently, business owners and investors who are into lending money to or borrowing money from other businesses or corporations abroad would be directly affected because exchange rates will affect the interest rate and the amount to be repaid. So, one would assume, it poses a threat to debt servicing.
Local markets are also indirectly affected due to interest rates and inflation, and the cost of running businesses might be high. Though, for countries that depend largely on imports, this could be beneficial for local competitors. The high cost of importation will lead to a low turnout on the importation, making such goods and services scarce. This scarcity will also lead to an increase in the prices of goods and services, thereby, redirecting the consumers to locally made goods and services since they are cheaper.
From the listing below, we can conclude why it is imperative to protect your business, whether influenced directly or indirectly. Now the question is how? The below ideas would give you an answer;
- Set Your Standard: Especially if you offer unique values abroad, you must set your standard by opting to entirely limit the currencies you get engaged with or set the prices of your values at your local currency. It is also applicable to businesses that lend money to or borrow money from other financial institutions or corporations abroad.
- Hedging through fixation: Especially if you purchase values from abroad, it is necessary to waive the risk of exchange rates by contracts fixation. It involves making a contractual agreement with potential clients by setting an exact amount you would want to purchase a value for a specific period regardless of the fluctuation in exchange rates. It is also applicable to businesses that lend money to or borrow money from other financial institutions or corporations abroad.
- Local markets in the face of exchange rate fluctuations must ensure that they maintain the original cost of running their businesses before these fluctuations and through the period. The implication is that product outputs might reduce, nevertheless, it’s a safe game to play not until there are obvious high demands for your products, of which outputs must be increased as this calculated risk could pay off.
Elvira Nabiullina, a Russian economist said,
Therefore, issues of exchange rates in businesses are inevitable. As an entrepreneur, you must be very resilient in whatever business you’re running. Remain very observant with the market trend, channel each of your skills and techniques to make sure every unplanned situation doesn’t work out to the detriment of your business, rather, to the benefit of stabilizing or improving your sales as well as profit margins.