Currency Risk

You run a brewery on the other side of the Canadian border. You import your beer to the United States and distribute it to different states in New England. When you’re selling your product in the United States to wholesalers, you’re dealing in U.S. dollars. But your brewery in Canada is operating with Canadian dollars, a.k.a. the Loonie, a.k.a. Monopoly money with British royalty on them. You buy raw materials in Canada with the Loonie, and you pay all of your employees.

But you sell your products in America using the dollar. This means that the currency exchange rate between the U.S. dollar and the Canadian dollar is a huge deal. If the Canadian dollar gets stronger against the U.S. dollar, it can impact your bottom line, because your cost of production will rise. If the U.S. dollar gets stronger against the Canadian dollar, this can be positive for your company, since it will be cheaper to export to America.

These considerations are part of a concept known as currency risk. Changes in the foreign exchange rate can have a significant impact on the bottom lines of organizations with international operations.

The performance of one currency against another can dramatically impact the bottom line of a company. It can also impact shareholders’ returns on investment if they own stock in multinational organizations. Companies do have ways to guard against currency risk though, such as hedging.