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Why is the foreign currency exchange market important to a business?

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Kale Emmerich eNotes educator | Certified Educator

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The foreign currency market is important to business because the exchange rates fluctuate daily between currencies, and a business is rarely doing business solely in one currency. More often than not, there are customers and suppliers that use Euros, Yen, Pesos, or some other denomination besides dollars. Depending on the exchange rate, the business's dollar may be valued higher or lower on certain days. This is very important to remember, and businesses can occasionally plan transactions to better favor their currency.

A company can also exchange currency to increase their overall value. Because the rates are not all entirely consistent, transitioning dollars to yen to pesos and back to dollars may yield more than the initial amount that was traded. Foreign currency trading, or Forex trading, is a useful tool for a company to maintain the highest amount of liquid, usable cash as possible.

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pohnpei397 eNotes educator | Certified Educator

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Foreign exchange markets are important to any firm that imports or exports as part of its business.  Changes in the value of the dollar (if we are talking about US companies) relative to the currency of other countries can change the firm's cost of doing business and/or its ability to sell its products.

For example, let us imagine a US firm importing things from China.  If the dollar gets weaker relative to the yuan, the firm's costs go up.  It has to spend more dollars to buy the products that it needs from China because it has to pay more dollars in exchange for each yuan.

Now imagine a firm selling to the Euro zone.  If the Euro gets weaker relative to the dollar, firms in the Euro zone will find that it is more expensive to buy the firms products.  They may well stop buying so much from the firm because it costs more euros to buy each dollar than it previously did.

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