FX is not science fiction, but it's just as scary.
Dr. Jones and her family are finally ready to take that well -deserved vacation in Italy. She's made call coverage arrangements, rechecked her passport and reserved a place at the local Doggy Daycare for her Shetland sheepdog. The final thing to do is get some euros so she will have some cash on arrival at Leonardo Da Vinci Airport.
For most travelers, this is their one and only exposure to FX (foreign exchange) risk. If the dollar is strong against the euro, you will be able to buy more gelato for your money. A weak dollar against the yen, and your sushi will cost you more. Now, image how global business owners feel.
Consider these facts. In the last 3 months, the Euro has fluctuated 15%, the Pound Sterling 26%, and the Brazilian Real 37%. China has changed about 4%, but that's another story.
According to Mark Price, the principal-in-charge of the Financial Institutions and Products group with KPMG's national tax practice (http://www.kpmg.com) , international companies conducting business in currencies other than their functional currency are exposed to FX risk. He goes on to point out that FX risk is typically segregated in to two types:
Transaction-arises from foreign currency receipts or payments, which impact the base currency values due to exchange rate fluctuations and exposure may be created from inter-company and/or 3rd party transactions
Translation-results from "translating" the local currency value of overseas assets, liabilities and other financial statemet values into a company's domestic currency for accounting puposes.
If all that creates a GAAP (Generally Accepted Accounting Priniciples) in your mind, think of it this way. Suppose you have a side business based in Florence (nice work if you can get it) and your revenues are deposited in euros to an Italian bank account in your name. Every month you get a statement indicating your balance . There are two risks. The first is that the euros you've accumulated , when denominated in dollars ,will fluctuate, and , secondly, you might not be able to get the money out of Italy to pay bills in Cleveland. The latter is called liquidity management by accounting junkies and refers to management of a business's access to cash and the firm's cash requirements such that the company can meet its obligations as they fall due.
Most bioscience companies are "born global". R/D collaborations, supply chains, management and money flow around the world from their inception. FX risk is one more thing to factor into the equation when going global.