Financial terms are not easy for everyone to understand. Only those who are adept in the field are the ones who truly understand the meaning of each field. Unless you are some sort of a CA or an economist, you would not know what exchange rate actually means.
Nowadays, international trade is pretty common, and paying and accepting foreign currency is nothing new. Thus, businesses working with foreign companies are at risk as the exchange rate can change at any point (and not necessarily in a way favorable to the company). It is a myth that individual operators and SMEs do not get affected owing to the exchange rate. It affects them as much as it does MNCs. It is also a myth that those businesses not operating at a global level do not get affected. A fluctuation in the exchange rate affects the economy as a whole and there is no escaping it.
However, it is absolutely true that business owners and investors receive the hardest hit due to fluctuation in exchange rates. From small businesses to sprawling giants, from small investments to millions of dollars, everyone gets affected because of a fall or a rise in the exchange rate.
The economics of the world itself changes when there is a change in the currency value. Business operations are far more vulnerable to these volatilities than anything else. The 3 business areas that are the source of the risk are:
- Transaction risks
- Translation risks
- Economic risks
Transactions bear a risk if a business owner is supposed to pay in foreign currency and the rate has suddenly shot up. This loss can easily be recovered in a short time. Thus, this cannot be deemed as a long term loss and businesses cannot collapse solely on this basis. Only in rare cases will a business totally collapse because of a change in the currency value.
Translations fall into risky positions when there are branches spread out across the globe. A change in the currency value will definitely cause a change in the overall final balance sheet of the company.
Economic risks concerns the situation where the market value is affected by sudden exchange rate fluctuations.
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