Why are foreign currency exchange markets important to businesses?

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kipling2448 eNotes educator| Certified Educator

Foreign exchange markets are not important to all businesses, only to those that engage in business transactions that cross international borders and involve multiple currencies.

The reason foreign exchange markets are so important to those companies that are engaged in business activities that cross international borders is that their revenue and expenses may be calculated in more than one currency. For example, a company, and credit card companies are the best example, that processes payments in foreign currencies has to be careful about not losing money if that foreign currency is currently greater in value than the domestic currency into which the money will be converted. Also, most commodities, for example, oil, diamonds, produce, and more, are traded on international markets, and when those markets involve multiple currencies, it is important again to be constantly cognizant of the relative values of those currencies. An item or commodity purchased abroad in the currency of that country, for example, the Japanese yen or the Chinese renminbi, but which will be sold here in the United States for U.S. dollars, means the relative value of those currencies dictates profits and losses.