Currency exchange risks- What should we do to cope with?

International trade is the common trend toward the globalization of world economy. It brings many benefits to the firm.

European companies invested in Asia countries got many chances to gain more profit by reducing costs. First is the labor resource. Some low- developed countries like Nigeria, Laos, Cambodia has a huge source of labor, who are unemployed. They are willing to work for foreign companies to pay off their expenditures. On the other hand, land resource also is plentiful, provides good conditions to infrastructure aspect.

In contrast, developing countries like Vietnam, Thailand as well got benefits from this trend. By expanding market share to over the world, companies can approach more potential customers, get more opportunities to gain profit.

According to figures from the US Commerce Department, United State, the largest economy reported an increasing up to 2.5% in the third quarter of the year 2011, partly due to the international trade (BBC, 2012).

However, is international trade always good, always brings benefits to organizations?

Following theory, one issue raised is the risk from currency and tax.

First is the tax burden. With different policies, tax rate may differ from countries. For example, car manufacturer like Mercedes Benz needs to consider the real estate tax rate before deciding to build its factory, in which tax rate in Cambodia is 0%. In Thailand, a tax of 12.5% is levied on the appraised rental value of real property while real estate tax is imposed at a flat rate of 12% on annual rental income of the leased property in China. Because of different policies, real estate tax in Vietnam is more flexible, which is decided by the occupation of the real property (Tax rates, 2012). In my opinion, if real estate tax rate is the unique issue needed to concern, so investment in Cambodia seems to be the best choice.

Another risk organizations may meet while trading or selling goods across countries is currency exchange risks. The risk is divided into three categories.: transaction, translation and economic risks.

According to European Economy, transaction risks refer to the influence of exchange rate toward the value of committed cash flows (cash flow decided in the contract). Risks rise because of unfavorable foreign currency fluctuation.

Translation risk is about the impact of exchange rate fluctuations on the valuation of foreign assets or liabilities. The risk occurs due to the internal reason, when parent company translates figure of asset or liabilities of foreign subsidiaries. Fluctuation of exchange- rate day by day can have high influence to performance of the firm.

The last economic risk is the impact of exchange rate movement on company’s performance compared with its competitor due to the unfavorable changes of exchange rates in short or long term.

The exchange- rate brings many obstacles to businesses during its operation. Journal “Strong yen hits Japanese carmakers” by Jorn Madslien on 2^nd December, 2011 reported the situation of Japan.

car industry. The world’s largest carmaker Akio Toyota even stated that "The current exchange rate has really made it difficult to be profitable making cars in Japan,". He also intended to reconsider Toyota’s commitment to produce three million cars per year in Japan.

Many discussions risen to discuss the solution for the problem, in range of business itself or even globally. The term “hedge” is used to replace for dealing with the currency exchange risks.

In range of organizations, solutions could be:

-       Insisting: foreign customers commit to pay contract in company’s home currency.

-       Intra- organizational currency is set by multinational companies.

-       Forward market (includes wide range of currencies) or futures (includes limited range of currencies) hedge: currency exchange is chosen at a fixed time in future.

-       Etc…

In range of global, global currency is now discussing. Economics editor Stephanie Flanders from BBC News listed out some facts.

“The US overtook Britain as the largest economy in the 1870s, but the dollar didn't truly displace sterling as the world's anchor currency until the 1930s”.

Or, “In the 1970s, Germany and Japan resisted a larger role for the D-mark and the yen for similar reasons. And in the lead up to the 2008 crisis, China had exactly the same reasons for holding back on the internationalisation of the yuan”.

(BBC News, 2012)

With many inadequate, that could be the reason why United Kingdom’s Government decides to use its own currency Pound, instead of using Euro currency as other European countries.

So, what is the solution for the problem?

Should Government find more solutions or just do nothing, and simply take the risks, hoping for favourable foreign exchange rates??