While the foreign exchange market continues to be extremely quiet, the volume of FX transactions continues to increase. That’s a clear reflection of how business in general is becoming much more global.
As an illustration, let’s take the entertainment industry. For decades, traditional film revenues had come from domestic ticket sales within the United States. However, recent data shows that now almost 70% of the studios’ annual revenues come from international markets. China and Russia are the two countries in particular whose love for Hollywood has grown rapidly over the past couple of years. Chinese box office revenues grew 36% last year, and China is now the second biggest movie market in the world after the U.S.
This is true in the music world too, where more musicians travel around the world on tours and for longer periods than before. Country music, which is primarily an American genre, has expanded its audience now to Australian and European listeners who demand live performances.
What does this mean from a corporate finance point of view? Having a global client base clearly makes the economic pie not only bigger and also helps diversify risk. In fact, some movies that did poorly in the U.S. have sold much better abroad. Additionally, ticket revenues for live performers are often higher in foreign counties.
But it also means that companies will continue to have increasing foreign exchange risk. Many companies feel that as long as they do business in U.S. dollars, they do not have any FX risk, but the reality is that while they don’t have a transactional FX risk they do have an economic one.
My View: Regardless of what currency you do international business in, and even for those that do it in U.S. dollars, it is important to know and understand the FX fluctuation risk. Sometimes foreign companies will not accept payments in USD and then you immediately have exposure. Make sure you get expert advice.
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