As the world grows more globally connected, understanding the role of currency exchange rates has become a necessity for any professional aspiring to work at an international company. In particular, modern executives need to know how economies, currencies, as well as their respective corporations all ebb and flow together.
If you’re interested in pursuing a career in international banking or finance, you can gain in-demand, global kills through an advanced degree such as a Master of Business Administration (MBA) in International Banking and Finance. The program equips graduates with not only in-demand business skills in areas like strategic management, finances, organizational behavior and more. It also prepares them with international insight into global markets.
What Are Exchange Rates?
An exchange rate is one currency’s value compared to another. The demand for both currencies is relatively similar if the countries have comparable economic output.
On a small scale, like when you travel overseas, currency exchange rates are simple to follow. But, for a major corporation that sells products, has manufacturers and ships products in dozens of countries, currency exchange rates can quickly become an organizational nightmare and a significant potential risk.
How Are Values Determined?
The values of different currencies and exchange rates are mainly set based on the supply and demand of each currency. Economic factors like interest rates, inflation or public debt usually influence the supply and demand of different countries.
Currencies are constantly fluctuating in value compared to each other, which impacts the balance of trade and the financial flow between countries. That said, some exchange rates are fixed, or pegged, to the value of a specific country’s currency.
Understanding Fluctuations
It’s important to note that currency fluctuations are not inherently good or bad. Instead, a cheaper or more expensive domestic currency will be better for some parties but worse for others. It depends on the nature of your business.
For example, the U.S. dollar “weakening” against the euro sounds terrible for all Americans. But, in reality, a weaker dollar can benefit exporters that send products to Europe, which can now sell them at a higher relative price. It will also help U.S. tourism companies, which can expect more European travelers to visit the States since the value of their Euros will go further in the U.S. than before. Finally, U.S. companies could also expect a surge from European investors.
Understanding not only currency rates but also your company’s role in the bigger economic picture is critical for business success, regardless if your company operates internationally or in the U.S. Having a grasp on the impacts of various markets helps you make sound business decisions.
Exchange Rates’ Impact on Business
There are several ways exchange rates impact the cost of doing international business. For example:
- Foreign currency conversion fees: If you are constantly exchanging currencies, you will likely have to pay a conversion fee of 1-3%. If you are not careful, these fees add up significantly over time.
- Supplier payments: You may need to purchase goods from a foreign supplier in their local currency which, again, can lead to hefty fees or overpaying for product.
- Foreign supply/demand: If the currency of a foreign market depreciates, then it decreases the spending power of residents in that nation. This can subsequently reduce the demand for your company’s products through no fault of your own.
- Forecasting: Keeping all the above in mind is critical to establishing and maintaining accurate forecasts for budgeting, ordering, expanding and more.
Depending on your role and career path, you will likely have to deal with one or more of these effects.
Safeguarding Your Business
There are a few common ways corporations can protect their business from the risks associated with exchange rate fluctuations.
- Fixed contracts: This type of contract outlines specific parameters for a deal or order, typically the price for imported or exported goods over a period of time. For example, a company might sign a fixed contract with a foreign manufacturer to supply a certain amount of raw material at a fixed price for the next 12 months.
- Buying in bulk: This strategy doesn’t apply to all companies. But, depending on the nature of your business, you can protect yourself by buying products in bulk when the exchange rates are favorable. For example, think of a cruise ship that can secure barrels of oil at a cheaper rate than normal. So, when the exchange rates are in their favor, it makes sense to order more oil and store it.
- Payment platforms: New financial technology is constantly emerging that makes paying overseas easier, faster and more convenient. By using the latest technology, corporations can protect themselves from unnecessary fees or changes to the exchange rate.
Gaining Expertise
If you plan to pursue a career in finance with an international corporation, then a thorough understanding of exchange rates is necessary. This is where an advanced degree, such as Texas A&M International University’s online MBA program, can help. This program, which specializes in international banking and finance, teaches students the fundamentals of interest rate mechanics, central banking practices, regulatory environments, securities trading and ethical dilemmas in banking. In particular, the program’s International Finance elective explores how graduates might forecast, encounter and respond to exchange rate fluctuations in their professional roles.
On top of that, students will learn the most up-to-date techniques for hedging risks in international portfolio investments. This gives graduates an immediate edge upon entering the workforce, and students can complete this degree online to help accommodate inflexible schedules. Regardless of whether graduates work for small- or large-scale, local or international companies, skills in international economics and exchanges rates will serve them well.
Learn more about the Texas A&M International University online MBA in International Banking and Finance program.
