Changes in currency can be very bad for businesses that don’t have a plan for what to do if something goes wrong. This could cause prices to go up, sales to go down, and the profit margin to get smaller. It is suggested that the company write and keep track of a policy statement that explains its view, goals, and acceptable actions for managing foreign exchange risk. This will make the company less vulnerable to these risks. To learn more, take a look at these objectives of foreign exchange management.
Any company that does business around the world should have a plan for dealing with changes in currency. This article provides a framework for developing a comprehensive foreign exchange exposure management policy in light of a company’s financial treasury goals, current business activities, and operational environment. Exchange rate fluctuations affect the cost competitiveness, profitability, and valuation of a company’s international activities. For a better understanding of the features of foreign exchange management topic, keep reading.
Objectives of Foreign Exchange Management
The value of the company is affected by changes in exchange rates because cash flows are very sensitive to such changes. Hedging is meant to protect businesses from the effects of unexpected changes in exchange rates. However, even though FX risk management has come a long way, there are still times when hedging isn’t enough.
This article examines economic exposure when a company must pay cash flows in a foreign currency that frequently fluctuates in value compared to its home currency. When traditional ways of managing risk don’t work, we suggest trying something new. Read on to learn more about objectives of foreign exchange management and become the subject matter expert on it.
Achieving Balance of Payments
Exchange control tries to fix the balance of payments by keeping the country’s foreign exchange needs within its means. This is done by only allowing imports when they are in the country’s best interest. Countries devalue their currency to increase competitiveness and gain more foreign currency.
Governments limit imports to necessary items and devalue currency to maintain control of foreign exchange reserves. Lowering currency value promotes exports.
Build Foreign Exchange Reserves
Increasing the country’s foreign exchange reserves could help the government reach a number of goals, such as keeping the local currency stable during times of crisis, paying off foreign debt, and protecting the country’s imports.
Differentiation as a Policy
Exchange control could be a way for the government to set itself apart. The government can make trade with some countries easier by giving them the foreign currency they need, but it can also stop trade with other countries by not giving them the foreign currency they need.
To Stop Capital from Leaving
The government says that capital flight could get worse if citizens and non-residents send more foreign currency out of the country. Possible causes include high taxes, low interest rates, rising political risk, pandemics, and other similar events. To stop money from leaving the country, the government may set up a system to limit the flow of money out of the country.
Maintain High Exchange Rate
Because of this, this is the main goal of exchange regulation. When the government sees that the exchange rate is not at a certain level, it will step in to get it back there. The Exchange Equalization Fund is a pot of money that the government uses to set the exchange rate. If a currency’s value exceeds another’s, the government sells its holdings in the currency on the market, raising supply and reducing its value.
However, depending on economic conditions, the government can overvalue or undervalue the currency. Overvaluation happens when a government raises its currency value compared to others, while undervaluation happens when it lowers its currency value.
Help out Local Businesses
The government can use exchange controls to shield domestic industries from foreign rivals who are more efficient and less expensive. This is done by limiting imports and imposing tariffs on foreign firms while promoting domestic exports and import substitution.
Some other Goals
The goals of managing foreign exchange can be more than those listed above. Make money on currency price differences, stabilize exchange rates, ease imports with foreign currency supply, and repay foreign debts using available foreign exchange.
Ensure Currency Stability
Governments can maintain a stable exchange rate for their currency by participating in the Forex market. The government stabilizes exchange rates by intervening in currency exchanges.
To reach these goals, the government could set up a fund to stabilize the currency or set a certain level for the exchange rate. When a country’s economy depends a lot on imports, it may choose to keep its currency exchange rate artificially high to keep import prices low and inflation steady.
Frequently Asked Questions
What does RBI do with Foreign Exchange?
The goal of the Reserve Bank’s policy on exchange rates is to keep the foreign exchange market running smoothly. As a result, it conducts extensive research on both domestic and global financial markets. It buys and sells foreign currency as needed to intervene in the market.
What do you Mean by “Foreign Exchange Management”?
The main goal of FEMA was to make it easier for Indian businesses to send and get money from other countries. Another goal was to keep the currency market in India in good shape. There are detailed explanations of every part of doing business in India with foreign currency.
Who is in Charge of Currency Exchange?
Foreign exchange businesses (FXBs) are a popular alternative to banks in India for sending money abroad. They handle about 25% of all international money transfers. When compared to traditional financial institutions, the majority of these companies’ USP is higher foreign-exchange rates. The Foreign Currency Management Act of 1999 governs all foreign currency transactions. FEDAI is in charge of them. (FEMA).
Conclusion
This is not like changing money at a gas station. There is no physical money exchanged; everything is done online. Instead, they bet on a single currency and hope to make money from its rise in value and strength (or fall in value and weakness, in the case of sellers) compared to the other currencies on the market.
Trading in the foreign exchange market entails buying and selling currencies from multiple countries at the same time. There is no actual monetary transaction going on. Speculators buy one currency against another in the hopes of making money in the future from a price difference. Check out these objectives of foreign exchange management to broaden your horizons.
