Premium Essay

Foreign Exchange Rate Fluctuation on Pricing Decision

In: Business and Management

Submitted By icolyn
Words 1094
Pages 5
What implication do fluctuations in foreign exchange rates have on the pricing decisions of export marketing managers?
Globalization is no longer an abstraction but a stark reality that virtually all firms, large and a small, face. Firms that want to survive in the 21st century must confront all encompassing force that pervades every aspect of business. However, exchange rate fluctuation is an issue that affects the decisions marketing managers make about pricing.

Management faces different decision situations, depending on whether currencies in key markets have strengthened or weakened relative to the home country currency. If the home country currency is weakened this would be an opportunity as exchange would be in a favourable position. A producer in a weak-currency country can choose to cut export prices to increase market share or maintain its prices and reap healthier profit margins. When revenues are translated into home country, the returns would be substantial. On the other hand it is a different situation when a company’s home currency strengthens, management would see this as unfavorable for exportation as overseas revenues would be reduced when translated to home country currency.
Management in making there decision must consider currency fluctuation even though the degree of exposure varies among companies. In an example, Honda is heavily dependent on the North American market, which accounts for more than half of its operating income. In trying to reduce currency fluctuation about three quarters of the cars Honda, sells in America are produced in the United States. In late 2000 the dollar had fallen to 108 Yen compared to 113 Yen the previous year, the unfavorable shift had a direct negative impact on corporate profits.
In responding to currency fluctuations global marketers could utilize other elements of the marketing mix besides price. If…...

Similar Documents

Premium Essay

Exchange Rate Fluctuation and Home Made Goods

... 1. INTRODUCTION The term “Exchange rate” is referred to as the value of the money of one country compared to the money of another country exchange rate movement is therefore the fluctuation in the value of a country’s currency when compared to another country at particular time period. The importance of foreign exchange rate on inflow of foreign private investment has been traced by Obadan (1994) who noted that its importance as the center pieces of the investment environment derives from the argument that a sustained exchange rate misalignment in terms of over-valuation or under-valuation is a major source of macro economics disequilibrium which spells danger for investment. A stable exchange rate encourages, foreign and local investor into such an economy. This is because, an over-valued exchange rate discourage export and negatively affect the foreign private investment Salako (2004). Further state that there is a long run equilibrium relationship between investment inflow to Nigeria and variables such as nominal effective exchange rate. A high foreign exchange rate increase the prices of goods and services and discourage exportation while at the sometime encourages importation of goods which are cheaper. This has negative effect on the investment and with such factors investors withdraw their money from such an economy (Solomon, 2012). It is therefore imperative to state that foreign exchange rate is a significant factor that determines......

Words: 5088 - Pages: 21

Premium Essay

Fluctuations in Exchange Rates in Australia

...TOPIC 2 – Explain the various factors that may cause fluctuations in foreign exchange rates. In the case of Australia, what industries are vulnerable when the foreign exchange rate is high? Explain your answer fully. An exchange rate is the measure of value of one currency against another currency; for example, AUD $1 = USD $1.03 (indirect quotation). Exchange rates are dynamic in that they are changing throughout every trading day. Basically, fluctuation is caused by demand and supply of the currency. As in any market, price rises with shortages of supply and increases in demand. Price falls with reduced demand and increased supply. Figure 1.1 Demand curve The demand curve for Australian currency shows the quantity of Australian Dollar (AUD) that buyers are willing to purchase at each possible exchange rate. Demand arises from several sources * Exports – Foreigners who wish to buy Australian goods and services * Foreign tourists and international students in Australia * Australians firms borrowing abroad * Foreigners investing in Australia (capital inflow, e.g. assets, dividends etc) * Current transfers into Australia * Speculators who expect the value of AUD to rise The curve is downward sloping (Figure 1.1 – blue) since it is reasonable to expect that the cheaper the price of the local currency, the greater would be the demand for the currency by the rest of the world. Supply Curve (red) Supply curve for Australian currency shows the quantity of......

Words: 1195 - Pages: 5

Premium Essay

Foreign Exchange Market Rates

...The foreign currency exchange rate is an extremely dynamic market that affects all American companies operating internationally. In the recent years, the US Dollar has been under a systematic assault resulting in a decline in its value across the major world currencies. “This assault has included vocal countries, China for example, in demanding that the US Dollar be removed as the standard international currency” (Batson, 2009, pg.1). The foreign exchange rate of a currency is a general measurement of the financial health of a country, though the rates of exchange are not tied specifically to financial measurements. Therefore, a stronger dollar will benefit Americans more than a weaker dollar. One of the blessings in disguise maybe the value of the trade deficits that US has with a foreign country like China, it may decrease because Americans are not able to purchase more of the imported goods as their costs increase. The decline in the dollar’s value has benefited some American companies. US companies that export to places where the dollar is declining has seen an increase in their bottom line. “Foreigners buying US products in their own currency are able to buy more products as the US products are cheaper” (Salvatore, 2007, p. 346). The downfall of a drop in the dollar versus foreign currencies is the affects that the depreciation has upon US importers and Americans traveling abroad. For US importers, the cost of goods increases because it takes more dollars to buy the......

Words: 585 - Pages: 3

Premium Essay

The Foreign Exchange Market & Exchange Rate and or sell goods. The foreign exchange market is a place where the transactions in foreign exchange are conducted. In practical world the external transaction requires the use of foreign purchasing power i.e. foreign currency. The foreign exchange market facilitates such transactions by performing number of functions. Definitions of Foreign Exchange Market According to Paul Einzig, "The foreign exchange market is the system in which the conversion of one national currency in to another takes place with transferring money from one country to another." According to Kindleberger, "It is place where foreign moneys are bought and sold." In simple words, the foreign exchange market is a market in which national currencies are bought and sold against one another. There are large numbers of foreign transactions such as buying goods abroad, visiting foreign country for any purpose. Corresponding nation in whose currency the transaction is to be fulfilled. The foreign exchange market provides the foreign currency against any national currency. However, it is to be understood that unlike other markets, this market is not restricted to any particular country or any geographic area. There are large numbers of dealers' instruments such as exchange bills, bank drafts, telegraphic transfers (TT), etc. There are certain other dealers such as brokers, acceptance houses as well as the central bank and treasury of the nation. Functions of Foreign Exchange Market a) Transfer......

Words: 4258 - Pages: 18

Free Essay

What Factors Influence or Determine Foreign Exchange Rates

...that you believe influence or determine foreign exchange rates (i.e., factors that you may want to monitor as an corporate international finance manager). Rank these factors from most important (1) to least or less important. (1/2 to maximum 1 page). Political Stability Inflation Interest Rates Speculations Strength of other currencies Current-Account Deficits Public Dept Terms of Trade Government Intervention Economic Performance Imports Exports unforseeable incidents (like natural disasters, gunshooting, terorrism) Central Bank Actions For the factor you ranked as number 1, write a brief statement as to why you selected it and why you think that factor is the most important in determining foreign exchange rates. (maximum ½ page). From my point of view, political stability is one of the most, not to say the most important factor that influences foreign exchange rates. Because, if there is no political stability in a country, the economic performance is not stable, too. Also consumer spending declines or is weak and trading sentiments for its currency turns sour, leading to a decline in that country's currency against other currencies with stronger economies. So to say, a country with political stability will also have most likely a stable and/or strong currency. We saw that in history many times, that political instability also lead to big changes in foreign exchange rates and also could lead to a financial......

Words: 281 - Pages: 2

Premium Essay

Exchange Rate

...Volatility of exchange rate The main objective of this research is to present a rationalized concept of the theory and composition of exchange rate that are compulsory to solve the important economic problems facing the economy in the country, like volatile exchange rate, unbalanced financial circumstances and frustration of government to have control over domestic money market. “Exchange rate” shows that how much unit of onenation’s currency can be purchased with one unit of domestic currency. More precisely, exchange rate is a conversion factor that determines rate of change of currencies. While exchange rates volatility shows that exchange rate is settled on demand and supply of one nation’s currency, it may turn out fastest moving price of currency and bring all the foreign capital in the economy. Exchange rate volatility can influence the decisions of policy makers and affect the volume of exports and imports. It can also affect the allocation of manufacturing of goods, reserve money, exports, imports and balance of payments. Exchange rate volatility provides chances to domestic investors to invest in foreign currency to obtain higher profits and thus domestic currency undervalue and foreign currency gain values. Moreover, this volatility of exchange rate directly influences the prices of exports, imports, reserve money, manufacturing productions and their growth rates. Traders and investors always support the system where the discrepancy of the difference between......

Words: 4807 - Pages: 20

Premium Essay

Foreign Currency Exchange Rates

...Foreign currency exchange rates . 3/28/2014 Instructor name Student name Foreign currency exchange rates Introduction: Foreign currency exchange rates deals with the study of foreign exchange gains and losses facing companies when they are trading there subsidiaries outside their reporting entity jurisdiction. A reporting entity is an entity which is the principle co of different subsidiaries operating under their control. Subsidiaries are the companies reporting under a principle co whose accounts are consolidated at the end of the reporting entity period. Reporting entity period is the period where the reporting entity accounts are prepared and subsidiaries accounts are prepared according to their reporting period and at the end they are consolidated with the reporting entity accounts so that their accounts give a true and fair view. Now the point is that subsidiaries accounts may be prepared in a different jurisdiction where as the reporting entity accounts are prepared in their home jurisdiction. Subsidiaries must report their accounts in their own jurisdiction currency as well as in the reporting entity jurisdiction currency so that there is fair accounting and the accounts are prepared according to standards. Body: IAS 21 “The Effects of Changes in Foreign Exchange Rates” International accounting standard on foreign currency deals with the study of foreign exchange risks faced by a company. An entity must report their accounts in their home jurisdiction......

Words: 2153 - Pages: 9

Premium Essay

Interdependence of World Financial Markets and Foreign Exchange Fluctuations

...Othman Yeop Abdullah Graduate School of Business Graduate Universiti Utara Malaysia BDFM 7053 GLOBAL ECONOMIC THEORY AND ISSUES UUM-Rezzen KL Third Semester May Session 2013/2014 Prof Dr. K. Kuperan Viswanathan SHORT PAPER #1 INTERDEPENDENCE OF WORLD FINANCIAL MARKETS AND FOREIGN EXCHANGE FLUCTUATIONS Submitted by: ZAHARIN BIN ALI MATRIC No. 95906 June 14, 2014 Short Paper #1 Page |2 1. INTRODUCTION With the increase in advancements in transportation and communications made possible by technology, the world has seen exponential growths in economic ties among all nations. In the last few decades, globalization has resulted in a rapid surge in the interchanging of goods and services reaching across further and faster beyond national borders, whilst increasing the interconnectedness of different markets and cultures. These economic ties come in the forms of international trade, foreign direct investment and monetary integration, made possible with the complementary increase in the interdependence of international financial markets. With further liberalization and deregulation, financial market interdependence grew in momentum alongside the worldwide capital mobilization. This growing interconnectedness of all the world financial markets and the degree of their interdependence have themselves created a subject of substantial interest among economists. The recent global financial crisis has only elevated this interest further, as the impact of U.S.......

Words: 4027 - Pages: 17

Premium Essay

The Effects of Changes in Foreign Exchange Rates

...of Changes in Foreign Exchange Rates By: Benjamin T. Givens INTRODUCTION Over the past few decades, different generally accepted accounting principles (GAAP) have been developed in various countries. These differences have arisen in response to the unique legal, regulatory, litigious, social, economic, religious, and cultural environments of the countries they were created in (Wiecek and Young, 1-2). The increase in globalization coupled with related regulations has given rise to the need for a common set of global accounting standards – International Financial Reporting Standards (IFRS). Leading the charge, the International Accounting Standards Board (IASB), formerly known as the International Accounting Standards Committee, has begun a movement toward harmonization and convergence of GAAP. More than 100 countries currently use IFRS, so if your business goals include global expansion, it is critical to educate yourself about the impact of IFRS on your financial reporting processes and business now (U.S. GAAP vs. IFRS). This paper will focus specifically on the differences and similarities between IFRS and U.S. GAAP with respect to accounting for the effects of changes in foreign exchange rates. The guidance related to accounting for foreign currencies in U.S. GAAP is included in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 830, Foreign Currency Matters. In IFRS, the guidance related to accounting for foreign currency......

Words: 2205 - Pages: 9

Premium Essay

Foreign Exchange

...BRAC University Journal, vol. V, no. 2, 2008, pp. 81-91 FOREIGN EXCHANGE RISK MANAGEMENT PRACTICES - A STUDY IN INDIAN SCENARIO Sathya Swaroop Debasish Department of Business Management Fakir Mohan University Vyasa Vihar, Balasore - 756019 Orissa, INDIA ABSTRACT Indian economy in the post-liberalisation era has witnessed increasing awareness of the need for introduction of various risk management products to enable hedging against market risk in a cost effective way. This industry-wide, cross-sectional study concentrates on recent foreign exchange risk management practices and derivatives product usage by large non-banking Indian-based firms. The study is exploratory in nature and aims at an understanding the risk appetite and FERM (Foreign Exchange Risk Management) practices of Indian corporate enterprises. This study focusses on the activity of end-users of financial derivatives and is confined to 501 non-banking corporate enterprises. A combination of simple random and judgement sampling was used for selecting the corporate enterprises and the major statistical tools used were Correlation and Factor analysis. The study finds wide usage of derivative products for risk management and the prime reason of hedging is reduction in volatility of cash flows. VAR (Value-at-Risk) technique was found to be the preferred method of risk evaluation by maximum number of Indian corporate. Further, in terms of the external techniques for risk hedging, the......

Words: 5520 - Pages: 23

Premium Essay

Pricing and Foreign Exchange Rates

...Pricing and Foreign Exchange Rates Contribution Analysis 1. Since the NZD price stayed the same but the exchange rate went down the Price in USD must increase to $108.70. The formula is: NZD price/exchange rate =125/1.15= $108.70 Since the US$ went up, the variable cost went up because the variable cost equals the old variable cost of $70 plus the new Us price minus the old: = 70+(108.70-100) = 78.70 Since $108.70-$78.70=$30 then there is no gain or loss to total contribution margin. 2. There will be 110,000 units sold for (a) low sensitivity and total contribution will be a gain of $300,000. There will be 90,000 units sold for (b) high sensitivity and total contribution will be a loss of $300,000. 3. Based on the given equations, there will be 130,000 units sold in (a) low sensitivity and total contribution will be a gain of $1,465,217.39. This is because when the prices were changed only to reflect half of the exchange change the NZD equally 120. Therefore, 120/1.15=$104.35. For unit contribution $104.35-$70=$34.35. When multiplied by 130,00 units the gain equals $1,465,217.39. Based on the given equations, there will be 120,000 units sold in (b) high sensitivity and total contribution will be a gain of $1,121,739.13. This is because when the prices were changed only to reflect half of the exchange change the NZD equally 120. Therefore, 120/1.15=$104.35. For unit contribution $104.35-$70=$34.35. When multiplied by 120,00 units the gain equals......

Words: 490 - Pages: 2

Premium Essay

Pricing and Exchange Rates

...immigration. I am not against and think that immigration has positive effects on economies period whether it is seen at first or not, but ultimately it does. says that 40% of largest United States companies are founded by immigrants or their children. Companies like EBay, Google, Brightstar, and U.S. Steel where all founded by immigrants. One of the largest companies in electronics, Intel, was even founded by immigrants. American students are the lowest achieving in almost all categories and these high-end cooperate positions are hard to fill with native-born Americans because there is a high achievement, motivation, and academic precedence of foreign-born students with the drive to push boundaries in the STEM fields. That is the fields of Science, Technology, Engineering, and Mathematics. Sixty percent of these foreign-born achieving students make up the STEM fields. If our leading people in these industries are migrant workers of astounding achievements and we do not let them stay when migrating, giving them the opportunity to grow and flourish, they go back to their countries and help them develop further instead. Opportunity cost most definitely presents itself in such circumstances. The balance of payments is not effected by refugees if the income earned by them and all monetary transactions remain within the country of refuge. The balance of payments is, however, effected if the there is any kind of transaction taking place to the home country of the refugee......

Words: 1189 - Pages: 5

Premium Essay

Foreign Exchange Rate Regime

...Studi Politici e Internazionali ‘International Economic and Trade Relations’ LM–62 MASTER THESIS in DEVELPOMENT ECONOMICS Foreign Exchange regimes and major currencies Supervisor Student Prof. Paolo Sospiro Parapatakam Praveen Reddy MAT: 62282 ACADEMIC YEAR 2013/2014 Contents Introduction 5 Chapter 1 7 1. History of exchange rate regimes: 7 1.1 Gold Standard System (1880-1914): 7 1.2 Interim instability (1914-1944): 7 1.3 Bretton woods system (1946-1971). 8 Figure1.World Trade (1929-33).............................................................................................9 1.4 Par Value system: 9 2. Classification of Exchange Rate Regimes: 10 2.1 De facto Classification (1998-2009) 11 Diagram1. De Facto Classification of Foreign Exchange Regimes (Nov 1998 – Jan 2009).......12 2.2 Revised De Facto Classification System (2009 January to Present): 15 Table1. Shares of Classifications Using the 1998 and 2009 Systems. 16 2.3 Revised Classification System Definitions: 17 Hard pegs: 17 Soft pegs: 18 Floating arrangements: 19 Residual: 20 2.4 De facto Classification of Exchange Rate Arrangements and Monetary Policy Frameworks-2014 20 Table2. Monetary Policy Frame work......

Words: 16529 - Pages: 67

Premium Essay

Interest Rate Influences Foreign Exchange Market

...Study……………………………………… 7 7. Scope and Limitation of the Study………………………… 7 8. Research Methodology……………………………………. 7 II. Literature Review……………………………………………… 8-9 III. Discussion III.1. Interest rate versus exchange rate in Bank deposit……… 10 III.1.1 Appreciate US Dollar in Bank Deposit factor…10-11 III.1.2 Depreciate US Dollar in Bank Deposit factor….. 11 III.2. Interest rate affected in Stock market…………………... 11 III.2.1 Depreciate US Dollar in Stock Market………..11-12 III.2.2 Appreciate US Dollar in Stock Market..................12 IV. Conclusion……………………………………………………… 13 V. References…………………………………………………….14-15 Abstract In this paper, I use high frequency data to investigate the extent to which interest rate changes originated in the United States by the Reserve Federal Fund. More specifically, I am interested in understanding in effects of changes in the Federal Reserve Fund’s interest rates on differential between (short term) local currency interest rates. I also investigate how interest rate influences to the foreign exchange market when Federal set the interest rate. The result indicates that Federal Reserve’s rate can influence foreign exchange market in the bank deposit factor and in the stock market. Key words: U.S Federal Reserve, Federal Fund rate, Interest rate and foreign exchange market. ACKNOWLEDGMENTS First of all, I have been blessed with the help of some wonderful people while preparing this term paper. Thanks must first given......

Words: 3112 - Pages: 13

Premium Essay

Exchange Rate

...-21 (revised) OFFICE OF INDUSTRIES WORKING PAPER U.S. INTERNATIONAL TRADE COMMISSION How Do Exchange Rates Affect Import Prices? Recent Economic Literature and Data Analysis Cathy L. Jabara Office of Industries U.S. International Trade Commission Revised, October 2009 Cathy Jabara is a Senior Economist with the Office of Industries of the U.S. International Trade Commission. Office of Industries working papers are the result of the ongoing professional research of USITC Staff and are solely meant to represent the opinions and professional research of individual authors. These papers are not meant to represent in any way the views of the U.S. International Trade Commission or any of its individual Commissioners. Working papers are circulated to promote the active exchange of ideas between USITC Staff and recognized experts outside the USITC, and to promote professional development of Office staff by encouraging outside professional critique of staff research. This paper is a revised version of Working Paper No. 21 dated May 2009. The paper has been updated to include 4 lags in the exchange rate estimation, instead of 3, and a new equation for Latin America is included. JEL codes: F10, F12 Key words: Exchange rates, pass-through, U.S. imports Address correspondence to: Office of Industries U.S. International Trade Commission Washington, DC 20436 How Do Exchange Rates Affect Import Prices? Recent Economic Literature and Data Analysis Cathy L. Jabara U.S.......

Words: 6701 - Pages: 27