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What are foreign currency effects?
Companies with significant operations or sales abroad will be affected by changes in foreign currency exchange rates.
If the dollar strengthens relative to a foreign currency, the price paid for the goods in the country will not be worth as much domestically when the company converts their profits back to dollars. Some foreign currencies fluctuate much more than the US dollar does, but even the dollar can behave unpredictably. This can have a tremendous effect on the bottom line of companies engaged in significant amounts of business abroad.
Large companies will sometimes hedge against the potential effects of exchange rate fluctuations by holding reserves of different currencies, or Forex derivatives. Sometimes big things can happen to foreign currencies at inopportune times. Rest assured that many international companies felt the effects of the falling Pound Sterling (£) after the “Brexit” vote, especially if they had payment due to them in Pounds at the time.
Even if it’s nothing quite that dramatic, currency effects are constant. If a company regularly receives revenue from their foreign operations, which must then be converted to their domestic currency, they not only have to keep up with their sales revenues and operations costs, but their bottom line will also be affected by the constant fluctuations of exchange rates.
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