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Before we can consider how to manage foreign exchange (FX) exposure it is first necessary to identify how serious the risk is and how, when and where it arises.
For those that have
no background in economics we need to briefly describe the macroeconomic
origins of foreign exchange exposure.
All countries of the
world have their own currency. Its value is based on the strength of its
economy. Some countries share a common currency and back it collectively with
the wealth of all their economies. The obvious example is the Euro in the EU,
but there is also the US dollar which is a federal currency backed by the
economies all the separate states of the USA.
If 50kilos of
potatoes in the EU cost Euro25 and in the USA they could be purchased for $US30
then the rate of exchange would be 30/25 = Euro1/$US1.20. This is called
Purchasing Power Parity.
This calculation is not so easy when trying to compare whole economies. Data is collected, processed and published so that economists can judge the relative strengths of the two economies. Foreign exchange dealers and speculators use this historical information as a basis on which to form judgements about the present and future strength and movement of a currency. Their judgements are strongly influenced by day-to-day economic and political events.
If you are importing or exporting, for expert commercial foreign exchange services, speak to us at Raphael's Bank.
Quick and easy foreign exchange deals via our branch network, treasury centres or over the Internet.
More information.