Describe two ways that currency value fluctuations might affect an international business:
Describe two ways that currency value fluctuations might affect an international business:
Homework Answers
Currency fluctuation can affect a business in following ways:
(1) When a domestic based firm (a US firm) sells its product in a foreign country, if US dollar appreciates (depreciates), its product becomes more expensive (cheaper) in foreign country and so, demand for its product will fall (rise). Therefore the firm's revenue will decrease (increase).
(2) If a domestic firm (US firm) has a substantial portion of total liability denominated in foreign currency, then if US dollar appreciates (depreciates) compared to that foreign currency, it takes less (more) US dollars to buy one unit of the foreign currency. Therefore, dollar-denominated value of the liability decreases (increases), which improves (worsens) the dollar-denominated balance sheet.
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