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Foreign currency exchange exposure and British traders
Many British companies deal exclusively in domestic trade. However, they can still be affected by fluctuations in the foreign exchange rate. The strength of the pound is directly influenced by fluctuations on the foreign exchange, and thus any trader can be affected by currency exchange rates.
For example, if the pound depreciates against the euro, it can affect a company’s profits, as the UK market floods with competitive products from the Eurozone. This is referred to as “economic foreign exchange exposure”, and is difficult to overcome. It is a particular problem if, like so many companies, you rely on importing goods and services to help run your business.
Companies that depend on importing or exporting goods are dependent on foreign currency exchanges in order to trade. They are at risk of “transactional foreign exchange exposure”. In order to conduct trade transactions they must first buy or sell which arises from the need to buy or sell foreign currency in return for GB pounds. Fluctuations in the currency exchange rate can work both in your favour, or cause a profit loss, depending on whether you are importing or exporting, and whether the pound is strong or weak against the other currency.
If you own assets and liabilities in an overseas subsidiary company, but trade within the UK, your balance sheets will need to be carefully thought out. Fluctuations in foreign currency exchange rates will affect the value of your business. This risk is known as “translational foreign exchange exposure.”
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