Understanding Risk - Currency Volatility

At first glance, one would think that a countries politics would not affect how businesses operates on a daily basis, but if one were to look at it from a macro perspective, a countries stability in politics actually affects businesses in a major scale. One of the major factors that can affect a business, especially those that outsource globally is the currency volatility.

Imagine a business that relies heavily on sourcing its raw materials from a different country and one day out of no where, the currency of the country its buying from increases by 20%, this would become an outright disaster for the company expenses and the company can do nothing to affect this as the prices agreed upon is still the same, because the currency of the country you're from has dropped or the other country currency has continuously become stronger. It is important to note that having a stable currency for your own countries currency is not enough as depending on the country you're buying from, the fluctuations will still affect your buying and selling power.

However as with all risk there comes opportunity. If the countries currency the business is in is stable, and they tend to hold a stronger position against other countries currency, they could potentially take advantage of a countries politics instability and source raw materials or parts from said country, similar to how some businesses or countries take advantage of earning profits from the wars of other countries.

 

One way to mitigate all of these risk and opportunity is of course to come to an agreement with your vendor on a set foreign currency price, such as SGD at 4.1% currency volatility, so that no matter what fluctuations appear, the price for goods will maintain at an acceptable margin. Companies also can outsource locally or do in-house manufacturing to minimize outside interference and even market its products as locally produce/sourced or in-house manufactured standard.

 

Currency volatility is always present in today's market and is especially important with globalization becoming the norm for every business and country. With rising politic instability across the globes, natural disasters, and pandemics increasing as the year goes by, it is important for companies to have mitigation strategies in place and maybe, take advantage of the planet dying to line their pocket even more.