Explain how exchange rate fluctuations pose a risk to manufacturing companies that rely upon an export strategy to compete in foreign markets.
What will be an ideal response?
When companies produce and market their products and services in many different countries, they are subject to the impacts of sometimes favorable and sometimes unfavorable changes in currency exchange rates. The rates of exchange between different currencies can vary by as much as 20 to 40 percent annually, with the changes occurring sometimes gradually and sometimes swiftly. Sizable shifts in exchange rates pose significant risks for two reasons:
1. They are hard to predict because of the variety of factors involved and the uncertainties surrounding when and by how much these factors will change.
2. They shuffle the cards of which countries represent the low-cost manufacturing locations and which rivals have the upper hand in the marketplace.
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