Foreign Exchange Risk

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Exporting and importing also implies considerable foreign exchange risks for the companies involved. Importers will have to pay a higher price if their home currency depreciates against the exporting foreign country and vice versa. International retailing operations also entail high exposure to foreign exchange risk as the exchange rate of any of the two countries fluctuates. The fluctuations in exchange rate …result in direct changes in the relative prices of domestic and foreign goods… (Bartov and Bodnar, 1994, p. 1758) It ultimately increases the exposure of virtually all forms of international operations to foreign exchange risk.Foreign exchange or currency risk affects a company in several different ways viz. sales level, future cash flows, financial reporting, product price and production etc. Bartov and Bodnar propound that exchange rate fluctuations …influence both the current and future expected cash flows of firms with international operations. (1994, p. 1758). Fluctuation in exchange rate can affect a company’s future cash flows by increasing or decreasing the price of goods and services in the domestic or foreign country. It can also affect a company’s operational performance by increasing or decreasing the cost of importing raw material. Currency rates have a significant impact on the reporting of sales level. If the foreign exchange rates are favourable, the company’s reported sales will rise (Bartov and Bodnar, 1994). Therefore, apart from affecting its real future cash flows, exchange rate fluctuations bear the capacity to influence its reported revenues.Exposure to foreign exchange risk can also affect a company’s production level and its prices. It will be costlier for companies to import products from a foreign country having a high exchange rate as compared to the domestic