Why are exchange rates so volatile
Currency volatility refers to the unpredictable fluctuations in exchange rates in the global currency market.
This volatility can lead to large losses - or gains. Currency volatility is the cause of currency risk.
Currency volatility poses one of the greatest credit risks for companies and this risk must be effectively hedged to protect the company's bottom line.
The volatility of currencies is caused by various factors, including inflation, interest rates, tourism, geopolitical stability, import and export, currency policy, etc.
Real events that caused strong currency volatility were, for example:
In January 2015, the Swiss National Bank surprisingly lifted the minimum euro exchange rate, the peg of the franc to the euro, which led to the fall of the single currency and turned the global currency markets upside down. The euro lost over 30% of its value against the Swiss franc.
In 2014, the Russian ruble lost around 50% of its value against the US dollar when crude oil prices plummeted (Russia's economy is dependent on raw material exports) and economic sanctions hit the country hard.
Apple Inc. and Google faced major losses in 2014 due to the strong fluctuations in the currency markets. It is essential for companies to hedge against such risks in order to protect their profit margins and net income. This is possible through an effective currency strategy.
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