Question

Jen knows that it is not possible to accurately predict how exchange rates might fluctuate and result in a loss of finances for her company. In other words, Jen understands the reality of foreign exchange______

Answer 1

Jen understands the reality of foreign exchange fluctuations and the potential financial risks associated with them.

Step-by-step explanation:

Jen understands the reality of foreign exchange fluctuations. Exchange rates can fluctuate a great deal in the short run, which can lead to dramatic changes in profits and losses for firms engaged in international trade. The unpredictability of these fluctuations makes it difficult to accurately predict how exchange rates might change, resulting in potential financial losses.

Answer 2

Jen is aware of the foreign exchange risk which can lead to significant financial implications for businesses involved in international trade due to unpredictable exchange rate fluctuations. These fluctuations affect profits, losses, and trade balances, and companies often hedge to manage this risk. Central banks may try to stabilize exchange rates to create a predictable business environment.

Step-by-step explanation:

Jen understands the reality of foreign exchange risk. Exchange rates can play a significant role in the financial stability of companies involved in international trade. As exchange rates fluctuate, they can dramatically affect the profits and losses of businesses. For instance, when the Indian rupee declined from 39 to 51 against the dollar over the span of a year, it reflected a substantial depreciation in the currency's value, which could have had a major impact on trade and profits. Firms that engage in exporting, importing, or compete with international companies can be greatly influenced by these fluctuations. The unpredictability of these movements means that companies cannot rely on stable prices for planning and projections. A central bank, however, may attempt to limit this volatility to foster a stable business environment that encourages firms to concentrate on productivity and innovation rather than constantly responding to the instabilities of exchange rates.

Moreover, expectations of future currency values can drive the supply and demand in foreign exchange markets, altering currency valuations without notice. This can lead to fluctuations in trade balances, as the changing value of currencies affects the cost of imported and exported goods. Companies may protect themselves from this variable risk by hedging, which involves using financial contracts to lock in exchange rates ahead of time, providing more certainty for transaction values. Nevertheless, the nature of the exchange rate is akin to a price determined by the supply and demand within these markets, subject to sudden changes that can have extensive financial implications for businesses engaged in international financial activities.