Kudler Fine Foods Exchange Rate Risk

There are five factors that could affect the exchange rate risk for Kudler Fine Foods including prevailing interest rates, the level of employment, economic growth potential, the U.S. trade balance and the actions of the Federal Reserve System. The benchmark interest rate of the United States is called the prime rate (Federal Reserve 2012). The prime rate is the best possible interest rate given to entities seeking to borrow funds and is typically mirrored after the best rate given by any one of the major banks located in New York City (Federal Reserve 2012). The prime rate matriculates throughout the banking industry and is universally considered to be a standard (Federal Reserve 2012).

The level of employment can affect exchange rate risk (Sullivan 2003). Lower employment level result in net savings, lower consumption, declining consumer confidence, decreases in aggregate currency value and increased exchange rate risk as the U.S. Dollar weakens against foreign currencies (Sullivan 2003). Conversely, higher employment level result in net spending, higher consumption, increasing consumer confidence, increases in aggregate currency value and decreased exchange rate risk as the U.S. Dollar strengthens against foreign currencies (Sullivan 2003).

The clamor for economic growth potential can produce periods of deflation and inflation, which in turn affect exchange rates (Beaudreau 1996). During a period of inflation, prices artificially rise incongruent to the supply and demand for products and services, while the value of the U.S. Dollar remains stable (Beaudreau 1996). During a period of deflation, prices artificially decline incongruent to the supply and demand for products and services, while the value of the U.S. Dollar remains stable (Beaudreau 1996). As a result of inflation or deflation, people are able to buy less or more in an economy experiencing inflation with the same amount of money as they would possess under normal economic circumstances (Beaudreau 1996).

The trade balance of the U.S. can affect exchange rate risk. When a company has a trade deficit, its citizens can use less of its currency to purchase imported goods (Sullivan 2003). When a company has a trade surplus, its citizens must use more of its currency to purchase imported goods (Sullivan 2003). The actions of the Federal Reserve System can affect exchange rate risk. The Federal Reserve System has control over the monetary policy of the U.S. It can lower the discount rate for banks to expand the economy and raise the discount rate for banks to contract the economy.