What is an effect of currency fluctuations on international businesses?

Currency fluctuations can have a significant impact on international businesses, primarily by introducing risks associated with exchange rates. When currency values change, the revenues and costs of doing business across borders can be significantly affected.

For instance, if a company's home currency strengthens against the currency in which it sells its products, it may receive less revenue when those earnings are converted back to its home currency. Conversely, if the home currency weakens, the company's costs for importing goods may rise, reducing profit margins. These unpredictabilities can lead to potential financial losses, making businesses vulnerable to currency risk. Hence, businesses operating internationally must manage these risks carefully, often using hedging strategies to mitigate potential adverse financial impacts caused by currency fluctuations.

This understanding of currency risk is crucial for international businesses as it affects their overall financial health and operational strategies.