Currency exchange risk can be especially acute. Take a look at key performers in 2018, for example. Compared to the front-running U.S. dollar, the Canadian dollar fell 8.5%, the British pound plunged 6.4% and the euro was down by 4.8%. Meanwhile, the uncertainty surrounding Brexit and the North American trade scene continue to loom large.
There are three main ways currency exchange risks can impact your company:
- Transaction exposure — when the currency exchange rate fluctuates after a contract has been locked in
- Translation exposure — when a percentage of corporate assets are denominated in a foreign currency and fluctuations lead to gains or losses on your home currency books
- Operating exposure — when your competitors are sourcing labour or materials from countries with a more beneficial exchange rate, leading to lower operating costs and more competitive pricing.
How to set up a transfer pricing strategy that plays well with currency risk
Transfer pricing refers to the ways companies price transfers, or transactions, of goods and services with related companies. Think, for example, of a parent company buying goods from an overseas affiliate. Currency value is one of the many variables that affect a company's prices. As a result, a sound transfer pricing strategy is one of the many items companies need to navigate when dealing with fluctuating currency values.
When setting up a transfer pricing strategy, keep these three key points in mind: