Wal-Mart and Foreign Exchange Rates
Wal-Mart prices its products in its American stores in terms of American dollars, but prices its foreign products in terms of the currencies of the countries in which they are being sold. The same goes for how the company pays its workers – they are paid in the currency of the country in which they work. Suppliers are normally paid in the currency of the country they are supplying from. The supplier is then responsible for paying its suppliers in a foreign currency, if they are abroad. This is particularly pertinent in the case of Wal-Mart, which must necessarily sell many goods that are imported from countries where goods can be more cheaply produced in order to keep prices as low as they are.
Wal-Mart has begun to produce a number of its own brands in recent years, among them Equate and Faded Glory (Reyes, 2006). Wal-Mart pays the makers of those of these items that are abroad directly with foreign currency.
In addition to the payments that Wal-Mart makes in foreign currency, the company holds reserves of British pounds and Japanese yen as a hedge. The company’s debt being held in these two currencies would increase or decrease by $601 million if the exchange rate between pounds and dollars changed by just 10% and $216 million if the exchange rate between yen and dollars changed by the same mere 10% (Wal-Mart 2008 Financial Review 16).
Because Wal-Mart analyzes its financial results in terms of American dollars, the profits that the company makes abroad are normally converted into dollars for determining their value. The dollar has performed poorly over the past few years, so the company reported a profit of $1.5 billion in 2006 and $4.5 billion in 2007 just from the effects of exchange rates (Wal-Mart 2008 Financial Review 13).
Wal-Mart’s international revenues increase if the dollar becomes weaker relative to foreign currencies. Money made abroad will increase in value because it can buy the c…