An enterprise engaged in export/import trade will be affected by the change in the rate of
exchange between the domestic currency and the currency in which the transaction is designated. For instance, an Indian company which exported to France ready-made garments when the Euro was quoted at Rs. 56.00 per euro will suffer a loss if the euro depreciates to Rs. 54.50 per euro by the time the Export proceeds are realized.
An international company which has a subsidiary abroad has the assets and liabilities of such subsidiary denominated in the local currency concerned, i.e., the currency of the country where the subsidiary is situated. The overall financial position of the parent company would be affected by any change in the exchange rate between the domestic currency of the parent company and the currency of the country where the subsidiary is situated.
In both the cases mentioned above, it is essential tat the business concern keeps track of the extent to which its funds are involved/exposed to the risk of exchange rate fluctuations and the extent of loss/gain that is likely to arise an account of the fluctuation in exchange rates.