15.2 Foreign exchange
It is probably true for many businesses, and for an increasing number of them, both
large and small, that they see themselves as players on the world stage. For a UK busi-
ness, a customer in Moscow is as important and desirable as one in Middlesborough,
all things being equal. Similarly, a source of finance in Tokyo is more attractive than
one in London, if the cost is less, again all other things being equal.
It would be wrong to see internationalisation of business as a new phenomenon.
It is certainly true that internationalisation is, for various reasons, much easier than
it used to be. Nevertheless, many businesses, in Europe and the USA in particular,
have traded internationally on a large scale for over a century. Today’s international-
isation, however, is at a level that would have been unimaginable as recently as
twenty years ago.
Having established that, in principle, internationalisation is an economically bene-
ficial approach, the remainder of this chapter will be concerned with identifying
the problems associated with businesses being international, and with practical
approaches to dealing with those problems.15.2 Foreign exchange
One of the biggest and most obvious problems of internationalisation is the fact that
not all countries use the same currency and that the relative values of any two curren-
cies may alter over time, sometimes with significant alterations occurring over very short
periods. Between certain countries, in particular time periods, the individual national
governments agree to ‘peg’ their currencies to those of the others in the agreement. For
example, most EU countries (not including the UK) were in an agreement to keep their
currencies pegged to one another, subject to minor fluctuations, for many years lead-
ing up to the introduction of the common currency (the euro) in 1999. Of course, the
introduction of the euro was a move to a more permanent and concrete removal of the
tendency for relative movements in currency values. Although such agreements and
arrangements exist, were you to select at random any two of the world’s trading
nations, it is unlikely that they would both be members of the same currency group,
and therefore you would expect exchange rate movements between the two currencies
over time. This is a particular problem because the business does not know for certain
the value of a particular transaction, in terms of the home currency.
Before we go on to look more closely at the problems of shifts in relative values of
currencies, and at how businesses can manage this problem, it will probably be useful
to take a brief look at the way in which foreign exchange markets operate, and why
relative currency values can shift over time.The need for foreign exchange markets
When a business sells goods or services to a foreign customer, the transaction will norm-
ally require some foreign currency be converted into the home currency, sooner or
later. Although a sale may be made in the foreign currency, the seller will normally
need to have its home currency to pay its employees and suppliers, to pay its taxes
and to pay dividends. Those in the home country to whom the business has financial
obligations will not normally be prepared to accept anything other than the home
currency in settlement. If the sale is made in the home currency, the foreign customer
will normally need to convert its local (foreign) currency to that of the seller (home