Foreign Exchange Markets Are One

Foreign exchange markets are one avenue that international businesses take to avoid losses during purchases and shipments. While some may argue that knowing the market and selecting the right technique saves the company money, there are also arguments that the techniques and specialty calculations required for such transactions can actually cost the companies as much as simply letting the market run its course (Giddy, 2003). This theory, known as the Purchasing Power Parity, has unequivocally shown that between the purchase and exchange of goods, the market prices between the two countries even out, resulting in little to no difference in exchange. Thus, the overall notion of manipulating the markets can actually be seen as wasteful on the part of businesses and often does not result in positive shareholder outlook. On such example of the futility of market manipulation is that of Japan.

In the 1970's Japan changed its currency exchange rate from the Bretton Woods Exchange Rate System (Taylor, 2001). The result was Japan taking an active role in intervening into the foreign exchange market. In just nine years, between 1991 and 2000, the Bank of Japan purchased and sold $304 billion U.S. dollars. While these figures may sound large, the reality is that this amount is actually very small compared to the total amount. Additionally, even with their interventions, there were periods of substantial loss of value for the Bank of Japan due to market fluctuations. Thus, the intentional purchase of currency in an attempt to impact the market resulted in losses that otherwise would not have happened. Such actions could nearly be argued as the equivalent of gambling or investing in risky stocks.

Due to the obvious risk and associated losses with market intervention it is only logical that such actions can be construed as wasteful and primarily useless for a business. In fact, modernly, most banks no longer attempt intervention in the marketplace at all. It can be argued, however that there is some value to remaining aware of currency exchanges. For example, determining some for of hedging for long-term purchase contracts can help businesses avoid season-related losses (Mizen, 2003). On the same note, however, it is just as simple for a business to require payment of the agreed upon amount on the actual day of exchange, not in advance. This allows complete avoidance of any market shifts as that current day's market price will set the total. At this point, it becomes apparent that the only reason for intervening or exchanging funds early would be to make a profit in excess of the agreed upon purchase price. While useful and a creative technique, the market is unpredictable and such measures can prove very risky.