Risk Latte - Blame it on FX

Blame it on FX

Rahul Bhattacharya
Mar 02, 2005

Foreign Exchange (FX) risk could be a multinational corporation's worst enemy. Extreme volatility in the FX market could not only wipe out the return from expensive investments but also place a company at a competitive disadvantage with its competitors. A very famous example is that of Caterpillar, a U.S. heavy equipment firm. The company in 1987 began a $2 billion capital investment programme. A full cost reduction of 19% was expected was eventually expected by 1993.

However, during this period Dollar-Yen experienced severe volatility and the Yen depreciated against the Dollar by around 30% (a massive drop) which placed Caterpillar at a serious competitive disadvantage vis-à-vis its major competitors such as Komatsu of Japan, even after adjusting for productivity gains.

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