“A world in which exchange rates fluctuate constantly is a threat to international marketing.” Discuss.
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I think that a world in which exchange rates did not fluctuate would be much more of a danger to international marketing.
It is true that firms would have much more certainty and would not be subject to losses if one currency fell suddenly against another. However, rigid exchange rates would create a world in which currencies were wildly misvalued. This would not be good for international trade.
A multinational company that manufactures goods in one nation and sells them in another makes a profit based on how much revenue it can earn in terms of the currency of the country that the company is based in.
If a company sells a large number of goods in another country at a very attractive price but the currency of that country suddenly depreciates, the amount made by the company in terms of its local currency is very less.
With large and frequent fluctuations in exchange rates it becomes difficult for companies to decide on what the ideal price would be for them to market their products in other countries. If they initially see that the country has a strong currency and price their products lower, they would incur a loss if the currency depreciates. On the other hand, if they price their products higher when the currency is weak and it later appreciates they may not be able to sell as many products as they could have if the price had been kept lower.
Companies can partly shield themselves from changes in exchange rates by measures like the use of forex market hedging instruments, shifting their manufacturing base to the same country where the products are being sold, etc.
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