How would the exchange rate policies influence a firms attitude toward international trade and operations?

Answer 1

Exchange rates are a very important part of what is referred to as "comprehensive income." Firms are required to recognize exchange rate gains and losses in their financial statements both under Generally Accepted Accounting Principles and International Financial Reporting Standards. In firms that do business in the multi-national arena, these gains and losses can have a significant on cash flow; perhaps more importantly, these gains and losses suggest how well a firm manages its foreign contracts, and how well it understands the economies in which it operates. As a practical matter, exchange rates impact the Cost of Goods Sold of a firm. Assume for the sake of argument that a firm enters into a long term contract to buy raw materials from a foreign supplier at a fixed price; now assume that the value of the dollar erodes relative to the foreign currency by 10%. The net result is an erosion of the economic value of the contract of 10%.