Forex: Fluctuations of Currency Values
The magnitude of changes in currency values can be divided into two categories: that due to devaluations or revaluations, when there is a change in the parity of a particular currency as related to other currencies, and that due to normal market fluctuations in a narrow band centered on parity or its equivalent.
Between the floating of currencies in August 1971 and until the new parties were set in December, the market fluctuations of the major ones tended to remain within fairly narrow limits on a day-to-day basis, although the range was wider than before.
This appears to result from the efforts of the central banks to maintain an orderly market. Generally, devaluations and revaluations occur infrequently. The businessman, who operates in more than one country then, may be considered to have two different sorts of problems, one long range, and the other short.
The simple solution to the currency value problem is to bill and receive all payments only in the currency of the originating country. But that is not really a solution. As pointed out in a preceding paragraph, what happens is that the payee or payor then has the problem of having to cope with the amounts of his own currency required to make payment or received in payment.
Inevitable that is reflected in the business relationship involved. To take an ordinary example, an importer wishes to buy certain equipment. He is quoted prices by exporters in dollars, in deutsche marks, and in pounds. Assuming that the equipment offered is generally comparable, the importer must make an evaluation of what the probable cost to him will be in terms of his own currency.
To the extent that his currency might be devalued in terms of dollars, that the deutsche mark might be revalued, or the pound devalued, some provision for the risk of changes in terms of his own currency must be made.
Furthermore, there will surely be changes in the day-to-day spot values of the currencies that can significantly affect the desirability of a particular transaction at the time of payment. In summary, when a businessman does business in more than one currency, considerations of relative currency values affect the transaction whether or not one of the parties takes them into account.
The export-import transaction is relatively clear-cut, but the problem is much more complicated when other types of payments are considered. That is particularly true when both sides of the transaction are controlled by one organization, as in the case of payments between affiliateds and parents.
The range of possible actions is great; it depends on the risk to be assumed, the facilities that exist for protection, exchange controls, and other factors that vary considerably with the country.