International Business/currency exchange rates
Why is currency exchange rates important to international business?
Currency exchange rates are extremely important to international business due to TIME.
TIME? what do I mean? Let's say that you have are a US based company and you are providing a quote for services and sending a contract for review to a Mexican based company.
The prospect / client is requesting that the quote for services and contract be issued in MXN (Mexican Peso Currency) and obviously, your USA based company operates with USD (US Dollar Currency.)
You must take the fluctuation of the currency exchange rate in consideration when calculating the costs for providing your service and the desired profit margin.
If you were to sign a contract with the prospect today for $12,000 per year ($1,000 USD paid monthly for 12 months for services to be delivered) at today's exchange rate of 12.15 MXN per dollar...The payment schedule in your contract would look like this:
Month 1: $12,500 PESOS
Month 2: $12,500 PESOS
Month 3: $12,500 PESOS
But what happens if the MXN currency exchange rate changes to 12.75 MXN per dollar during month 3?
You would receive $12,500 PESOS. However, you would only receive $980.32 USD (after the exchange) instead of your projected / planned $1,000 USD.
What many companies do is they take into consideration a 12 month history of the currency fluctuation and when establishing pricing and contracts (for services) - they will give themselves a "cushion".
Let's say that over the past 12 months, the MXN did not exchange for less than 12 MXN per dollar and that it averages between 12.20 and 13 MXN per dollar...The company may establish it's pricing based on 12 MXN per dollar so that they do not take a loss as noted above.
Another way of addressing this is to fix your contract to the exchange rate based on US pricing.