Flexible Pricing Policies in Forex

The remaining area in which protection may be provided is flexible pricing and planning to compensate for actual or expected changes in currency values.

Basically, the methods stated up are a cure for the symptoms and not the disease. Devaluations or revaluations occur at a moment in time, but they are the result of economic and political forces that extend over much longer periods.

Since the forces exist, the prudent businessman should structure his business to take them into account properly. Principally, what are involved are inflationary influences that increase at different rates in different countries. Evaluation of results in terms of a common currency tends to highlight changes in value of other than the common currency.

Forward coverage and management of assets protect against only the immediate change; other measures must be adopted to protect the business from the erosion of values by inflation.

Fundamentally, what is necessary is an increase in prices to offset the loss of values from inflation. Of course, that is what inflation in the broad sense is all about - an increase in prices on a wide scale that out• runs any productivity benefits. Changes in prices are difficult. There is always the feeling that increases will result in a loss of sales, and there is, therefore, a considerable amount of management inertia to overcome.

That is particularly true when the profit level of the business in terms of local currency continues to be good or even shows substantial improvement on a period-to-period basis. However, the improvement may actually include a return of capital in an economic sense when depreciation charges are inadequate to cover replacement costs.

Because of the inertia described, price increases almost inevitably lag behind inflationary changes. The proper time to change prices is well before currency value changes occur, not after they occur.

Major changes in currency value are often coupled with various types of price and wage controls, which attempt to dampen down the inflationary forces that gave rise to the changes. It is much more difficult to increase prices at such times, and the result is to stretch the economic loss out over a period of time. The preceding considerations apply equally to doing business in one country only, but the effect on one currency in terms of another is much easier to see.

To cope with the situation, a flexible pricing policy that permits and leads to price changes in line with the underlying inflationary forces should be adopted. It is a mistake to assume that price equivalence in terms of more than one currency is adequate protection, since that equivalence can change suddenly just when it is very difficult to bring prices back into line again.

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