Hi sveta,
There are many benefits to your customers and suppliers if you are
able to trade with them in euros. These benefits may in turn benefit
your firm, or they may not.
Customers benefit in many ways. First, they are more readily able to
compare the cost of your goods with your competitors if you are all
pricing in the same currency. Second, they don't have to worry about
exchange rate risk (if they sign a contract with you for a certain
amount of your local currency, and the value of the euro drops against
your currency before they pay you, they effectively have to pay more
than they planned). While they can hedge against this, it is not free
to do so, and it requires a certain amount of financial
sophistication.
Suppliers share similar benefits in that they are able to quote the
cost of their goods to you in the manner in which they are most
comfortable, and you have eliminated their exchange rate risk. You,
however, have the problem of comparing their costs with quotations in
your local currency and managing the exchange rate risk.
The fact that you are effectively easier to do business with because
you are taking on the exchange rate risk and dealing in the currency
that your customers and suppliers are most comfortable with may
benefit you in terms of additional orders and/or reduced supply
acquisition costs. However, you are bearing the exchange rate risk in
your transactions, which, if there is a significant lag in time
between the pricing of a transaction and the actual monetary
transaction, could be sizable. Furthermore, your pricing is subject
to greater transparency because it is more readily compared with your
competitors' pricing, which may be beneficial or harmful to you
depending upon how you price relative to your competitors. If your
customers discover that you have been much higher than your
competitors, and they were not aware of it, you may experience a
backlash when they find out.
The exchange rate risk you would be taking on can be hedged against
effectively, but it requires some transaction costs and financial
sophistication to do successfully. Moreover, many companies have gone
astray by moving beyond hedging and going into currency speculation
with occasionally catastrophic results. This is a temptation that
should almost certainly be avoided.
If you are able to leave the currency in euros to invest in foreign
subsidiaries or to buy supplies, then your exchange rate risk is much
reduced except for reporting on your financial statements, which must
be translated to your local currency. While the reduced revenue from
an unfavorable currency swing may be offset by lower supply costs, if
revenue is of great importance to your investors, you may have
additional explaining to do in order to keep them on board.
In general, the shorter the time between when you agree to a price and
when you do the actual financial transaction, the less of a problem
the currency swings are. At a previous job, I worked for a software
company where we agreed to pricing for our product upfront but then
got paid gradually during the course of implementation over a
multiyear period. A considerable amount of hedging was required to
avoid winding up with far less revenue than we expected when we signed
the contract in the event of a dramatic change in exchange rates.
I hope my response has provided you with a good overview of issues to
consider before trading in euros or any other foreign currency. Other
foreign currencies, which may be considerably less liquid than euros
and subject to stringent issuing government regulations, have
additional risks beyond those discussed here. Some of the measures
taken by governments to control flows of their currencies during the
1998 Asian crisis could be extremely detrimental to a business.
Wonko |
