Business Studies – 6.2.4 Exchange rates | e-Consult

A significant change in the exchange rate can present challenges for businesses that import goods and services, primarily due to altered costs. Businesses need to adapt their strategies to mitigate the negative impacts. Here are some potential responses:

Hedging: This involves using financial instruments (e.g., forward contracts, options) to fix the exchange rate at which future transactions will occur. This provides certainty and protects the business from adverse exchange rate movements. Example: A UK importer could use a forward contract to lock in the exchange rate for a future shipment of goods from Germany.

Price Adjustments: The business may need to increase the price of imported goods to cover higher import costs if the domestic currency weakens. However, this needs to be carefully considered as it could reduce demand. Alternatively, the business might absorb some of the cost increase to maintain competitiveness.

Sourcing Alternatives: The business could explore alternative suppliers in countries with more favorable exchange rates. This might involve switching to a supplier in a country whose currency has weakened against the domestic currency. Example: A UK clothing retailer might switch from a supplier in Italy (where the Euro is strong) to a supplier in Bangladesh (where the Taka is weaker).

Cost Reduction: The business could look for ways to reduce other costs, such as improving efficiency, negotiating better terms with suppliers, or streamlining operations. This can help to offset the impact of higher import costs.

Repricing and Value Engineering: The business might re-evaluate the product to see if it can be redesigned or modified to use cheaper materials or components, thereby reducing the overall import cost.