Exchange rate is the price for which the currency of a country can be exchange for another country’s currency. The exchange are so important to businesses, this is because businesses are affected by changes in the exchange rate for a number of reasons. One way they are affected is that exchange rates have an influence on the price of imports and exports. And exchange rates can affect the prices for foreign investments. Businesses with products that are sensitive to price changes are likely to feel the impact of slight change in the exchange rate. This is because if export prices rise, the number of sales will fall drastically, and the total revenue for exports will fall.
Exchange rate also affects businesses in terms of the response of customers, the degree of control over prices and importing components and raw materials.The exchange rate will always affect the consumers whether the exchange rate is high or low for them. Brand names products are products that are always on demand , so even if their prices increase, consumers do not reduce the amount by much as these products are having an inelastic demand. The effect of the exchange rate is that if the value of dollar had to fall from 1$=1.
8 pounds to 1$=1.5 pound. The a firm selling 1,000 bananas to America each month for 5 pounds at an exchange rate of $1 = 1.8 pounds, would receive 5,00 pounds in revenue.
If the exchange rate fell to $1=1.5 pounds, and the demand for bananas was price inelastic, then the business will have the option of keeping the price of the bananas at 5 pounds. With the new exchange rate 5,000 pounds would be worth $3,333 (5,000/1.
5), so it would have depreciated to the dollar. Businesses that deal with products that are prices sensitive such as book and fruit are affected by a slight change in the exchange rate. If exports prices rise the volume of sales will fall by a greater degree, and the total income (revenue) for exports will fall. However if exports prices fall, revenue should be greater because the increase in quantity sold is relatively greater than the fall in price.The degree of control over prices is not heavily affected the exchange rate. This is because not all businesses have the same degree of control over prices of their goods and services. Some businesses have no control over prices of the products, thus fluctuations in the exchange rate will not make them change their prices on products, however if there is a big change in the exchange that will be harmful to the business because their prices are too high will competitors or their current prices will make a loss for the business, then the business will have to re-think their prices.On the other hand business will a high degree of control over prices of their goods and services may adopt some strategies and methods based on their pricing, such as customer value pricing, or reducing prices to a significant amount to beat competitors.
They might decide not to let the exchange rate alter the pricing of their prices and of their exports, although their sales revenue may change. For example a golf shop selling a highly popular name brand of its equipment and is loyal among its customers might be willing to change their prices dues to a small fluctuation in the exchange rate, this is because prices will have been carefully chosen to suit particular markets. In this case, only a large rise in the exchange rate will also threaten profits would cause a pricing re-think. And as well as knowing that the brand is popular they know that customers will still buy. It would be different for a name brand that is not popular, it could an opportunity for then to be cheaper and people may want a good name brand that is cheap.The effect of the exchange rate on importing components and raw materials is that firms that businesses that tend to import components or raw materials a lot would depend on a number of factors. These are mostly external and therefor the business has no control over them, which then lends them to come up with viable strategies.
The first factor that they would have to depend on is whether or not any long term agreements on prices had been reached. This is because there will be knowledge for the business of their prices and if there were to be a dramatic change in the exchange rate, reasonable precautions can be taken. The second factor is that whether the business had already bought foreign currency to pay for future imported components or raw materials. If the business hasn’t bought enough money to pay for the components and the raw materials, that will limit the things that they will be able to get. Lastly whether or not the business from which they are importing from decide to alter their prices. The rise in the supplier prices will influence the prices of the business, this is because as most businesses aim to make a profit or just prevent a loss.The exchange rate is constantly changing and everyone that is connected with businesses is affected, such as internal and external stakeholders. However the exchange rate affects international business a great deal, but minor to national and local businesses in a country.
The exchange rate can be positive and negative to a business, as the exchange rate serves opportunities and threats to business. The exchange rate is part of the external environment so businesses can’t control it, but businesses that cope will with the exchange rate whether it being positive or negative they always grab the opportunity by coming up with good business strategies.