Changements de taux de change (document en anglais)

Table of contents

Introduction

I. Marketing Decisions

II. Production Decisions

III. Financial Decisions

Conclusion & Recommendations

Introduction

Our world of today consists of 238 countries and territories (Population Data, 2013), 193 are members of the United Nations (Rosenberg, 2012), and of 182 official currencies (Countries of the world, 2013).

And this is with the growing globalization, with world exchanges of goods and services, world contracts, world imports and exports made every day around the world that people had to find a way to pay for something that does not come from their own country, of which the price is not expressed within the same currency (Evans, 2011).

Thus, the exchange rates between currencies appeared (Evans, 2011). Indeed, according to Investopedia (2013), exchange rate is “the price of one country’s currency expressed in another country’s currency. In other words, the rate at which one currency can be exchanged for another”. In this way, it is possible to buy something in China whereas we come from a Euro country. With the exchange rate we could know that 1 Euro represents around 8 Chinese Yuan Renminbi and that 1 CNY represents around 0.12 Euros (XE, 2013).

Like that we could go to a bank and convert our Euros in Yuan Renminbi according to the exchange rate, if we have to pay something in Chinese currency.

These exchange rates can be:

- Set or constant. It is determined by the State or by the central bank.

- Variable or floating. It is determined by the supply and the demand of the currencies in the exchange market. Most of the currencies proceed like this. The exchange rates change permanently in function of the interest rate, the inflation, and the purchasing power (Martinez, 2012).

Thus these fluctuations of the exchange rate have so on an effect on the international businesses and particularly on the functional decisions faced by managers.

In this assignment, we will emphasize the three functional operational areas in three different sections: the marketing, the production and the financial areas, which could influence a manager’s decision-making.

I. Marketing decisions

In this first section, we will emphasize the impact of the exchange rates’ fluctuations on the marketing decisions faced by the managers. Indeed, these fluctuations affect demand and supply of a company’s products and affect also exports and imports at home and abroad (Wikinvest, 2013). If the exchange rates drop, this modification has an influence on the price of the imports and of the exports. Exports become cheaper in other currencies and imports become more expensive (Riley, 2012). In the table below, the impacts on the imports and on the exports in a country are detailed:

Table of the exchange rates’ fluctuations impacts (Wikinvest, 2013):

Domestic Currency Imports Exports

Goes Up – Appreciates – Demand for the currency goes up – Are cheaper – Importers are happy – Imports increase – Goods are cheaper – Higher profits – Lower prices – Companies are more competitive

Are more expensive – Exporters are unhappy – Exports decrease – Cut the profit – Increase prices – Lower demand – Companies are less competitive

Goes down – Depreciates – Demand for the currency goes down – Inflation – Are more expensive – Importers are unhappy –Imports decrease – Companies are less competitive

Are cheaper – Exporters are happy – Exports increase – Companies are more competitive

To support this table, Import Export Manufacturer (n.d.) gives us a good example:

Japanese manufacturers sold cars to the United-States between 1986 and 1987, thanks to the sharp rise in the value of the yen. However at the end of 1986, the price of the dollar lost 47% against the yen, so the advantage of the Japanese manufactures disappeared. The prices rose and profits were cut because the competitiveness was really threatened. The American imports decrease and they were looking for cheaper products. The American managers had to find a new market and so they began to make businesses with Korea of which the prices were lower. They took the opportunity of making businesses where the currency was more favorable for them and they began to invest in a new country. Thus, the American businesses changed drastically because of the money depreciation.

Managers have to be very careful of where they want to launch a market. Indeed, it is a big deal for them to understand the relationships of the world currencies and of the operations made in a global economy, to be successful. Company could earn lot of money if they understand this kind of business but also could lose a lot if they fail to understand the relationship between them (Bized, n.d.).

Indeed, it is not possible to know exactly what represents a foreign investment, either a commercial operation. This incertitude breaks the world exchanges, or increases their costs with protection contracts against the risks of fluctuations. These variations have a knock-on effect on the price of the goods and services firstly as in the chart below (L’étudiant, n.d.).

The competitive context is also touched and it can lead to irreversible costs. Indeed, a company enters a market because of a favorable evolution of the exchange rates. So there are costs to enter and to maintain the business, it is an irreversible investment even if the money depreciates later. It could break down some companies which have credit issues. So some companies will be reluctant to enter in a new market, known by really volatile exchanges rates. The managers really have to think about it and maybe use techniques to avoid these problems (Héricourt and Poncet, 2013).

Then with the example of the oil crises in the late 1990s we can also

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