Question

international business environment

Consider the appreciation of a currency. What effects might this have on international companies exporting overseas?  What actions could companies take to minimize these effect

Answer 1

Currency appreciation, or increase in value compared to other currencies, can affect the Trade Deficit. The trade deficit might worsen if the local currency appreciates because imports become cheaper and Exports become less profitable, causing the domestic demand to fall.

It will adversely affect our exports, citurus paribus (all other things being constant)

Appreciation of home currency will cause relative increase in price of domestic goods for the foreigners. Thus consequently, the demand would decrease (Law of demand) and hence exports will be lesser.

Let's assume one US dollar equals 600 Chilean pesos, and a pound of local apples costs 1 dollar. Chilean apples cost 600 Chilean pesos (also one dollar). If the dollar appreciates and buys 700 pesos, imported apples will now cost 0.85 dollars (the same 600 pesos). In Chile, American apples will cost 700 pesos instead of 600.

Measures to Counteract the Effects

• Companies can enter in Exchange Clearing Agreements, Payment Agreements for making Exports.
• Companies can Setting up a Foreign-currency account or using Forward Exchange Contract or Currency options or market orders.
• The actions to counteract the effects of currency appreciation usually focus on stabilizing the exchange rate and protecting local producers.
• To prevent further appreciation, governments might increase national reserves in foreign currency. By buying foreign currency, they increase its demand and prevent further appreciation.
• To prevent imports from replacing local production, governments sometimes increase taxes on certain imported goods, so local consumers remain likely to buy local products.
• Some countries also offer subsidies to local producers, helping them to remain competitive and cope with lower local prices and less profitable exports.