In a globalized economy, more and more companies are doing business in all areas of the world.
In a globalized economy, more and more companies are doing business in all areas of the world. This creates an issue with regards to cash and the cost of currency relative to other forms of currency. As Block, Hurt, and Danielson (2019) in one example described, “…US companies doing business in Europe had to translate their euros into fewer dollars, so their foreign earnings in dollar terms were negatively affected by the falling euro. But as the euro rose [mainly during the 2008 recession] the trend reversed itself”. This example shows that global business remains an essentially zero-sum game, where in order for one area to be successful, another area needs to become less so. Since almost all currency is valued against the dollar, as the dollar becomes more valuable, other currency falls in value and vice-versa. This can put companies in negative financial positions depending on where they operate from and the current value of their currency against the dollar. Another example described by Block, Hurt, and Danielson exemplifies this scenario, “While the falling euro and pound made European vacations more affordable to Americans, it also put US companies who export to Europe at a competitive disadvantage. American made goods became more expensive to Europeans who pay for their products in pounds or Euros”.
Taking the above information and applying it to John Deere, since they are a massively global company, price fluctuations among different currencies absolutely has an affect on their business. In the major aspects of the business, John Deere describes the “…unfavorable effects of currency translation” in regards to its largest areas of operation, Agriculture and Construction. Furthermore, the outlook for the company references multiple areas where currency translation, global politics, and global financial markets could all adversely affect John Deere if anything even remotely negative occurs. John Deere specifically warns investors of the various issues that could potentially affect the business financially (these are just naming a few), such as, “…customer confidence in general economic conditions, … foreign currency exchange rates and their volatility, …. inflation and deflation rates, … natural disasters; and the spread of major epidemics”. So, for the first quarter of John Deere’s financial year, despite having sales increase, the company was negatively affected by the change in currency translation up to 1% in almost all aspects of the business. Large companies like John Deere can hedge against foreign exchange risk through the use of foreign exchange risk management. According to the text, there are three main ways to hedge against financial loss; forward exchange market, money market, and currency futures market. Each option helps to mitigate the risk of exposure and helps large companies to take payment quickly and not be exposed to potential long-term fluctuations caused by exchange rate changes. Obviously for a company as large as John Deere with a company footprint literally around the world, reducing the loss of revenue due to changing money-markets can make a large difference in-terms of financial reporting. 2% of $517 million dollars (first quarter income for John Deere) is a little over $5 million dollars; this potential loss could be used to help cover the added cost of employee separation packages which caused an increased expense for the company. Needless to say, any kind of steps that can be taken to help avoid undue financial loss due to currency exchange can make a large difference at the end of a quarter and at the end of a year.
References
Block, S. B., Hurt, G.A., & Danielson, B.R. (2019). Foundations of financial management (17th ed.). Retrieved from https://na01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.vitalsource.com%2F&data=04%7C01%7C%7Cc32204dd93264203c2ce08d8cea6e4ec%7C84df9e7fe9f640afb435aaaaaaaaaaaa%7C1%7C0%7C637486563478868962%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C1000&sdata=IrvvuoY9g1VN0tBtKzcIRRY8oW1O03cjlKsqE7QtMos%3D&reserved=0 (Links to an external site.)
Answer preview to in a globalized economy, more and more companies are doing business in all areas of the world.
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