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A PARAGRAPH FROM THE TEXT:-
A COMPANY MAY NOT HAVE ANY TRANSACTIONS IN A FOREIGN CURRENCY I.E. IT BUYS AND SELLS IN ITS HOME CURRENCY, BUT IT IS STILL AFFECTED BY ECONOMIC RISK.
THIS CAN BE DUE TO:-
COMPETITIVE POSITION – EVEN IF A COMPANY TRADES WHOLLY IN IN ITS OWN CURRENCY, OTHER COMPANIES CAN CAUSE IT TO LOSE MONEY IN THE FORM OF REDUCED SALES. FOR EG. IF A COMPETITOR COMPANY TRADES (EITHER BUYS OR SELLS) ABROAD WHERE THE CURRENCY IS MORE FAVOURABLE – CHEAPER FOR SUPPLIES, OR ALLOWS A HIGHER PRICE FOR SALES,THEN THE COMPETITOR WILL BE MORE PROFITABLE. CONVERSELY, IF THE EXCHANGE RATES ARE ADVERSE FOR THE COMPETITOR , THEY WOULD BE LESS PROFITABLE.
Are they saying in the example that the competitor has invested in another country and dealing in that countries currency and that’s why a favourable exchange rate allows a higher price for sales? Please let me know if I am correct. I am confused about the part about “allows a higher price for sales”. Because if the competitor is trading in its home currency a favourable exchange rate would cause it to lose sales.
When selling abroad, the competitor might become more profitable if exchange rate makes its products more profitable. More profit earned from exports might allow that competitor to cut prices at home thus racking up competition or might allow it to launch more new products.
Say company is exporting from the UK to the USA and the current exchange rate is $1.5=£1. In the USA, the company charges $60 to be competitive. That earns £40.
If the exchange rate moved to $1.25, then the sale would yield $60/1.25 = £48, so it is effectively enjoying a price increase in its home currency.
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