How does an exchange rate affect the businesses directly?

Like all other trading markets of the capital world the forex rates are also subjected to volatility on account of various parameters like demand & supply, investment flow etc.

Due to such volatility the cost & revenue budgeting of the importers and exporters of various goods and services get affected.

The affect is due to the change is exchange rate.

For example a person Mr. A in US has exported fruits to country Mr. B in Japan.

Currency for US: USD

Currency for Japan: Yen

Hence Mr. B would be making payments to Mr. A on a specific date for a specific amount of USD.

Current exchange rates for Yen/USD is 115

Now, if the exchange rate holds stable on the date of payment its fine for both the stakeholders.

However an increase in the forex rate to 118 would mean that the costing for Mr. B in Japan has increased by around 2.50% whereas a decrease would mean that his costing has proportionately gone down.

On the other hand if the payment is to be done in Yen then an increase of forex rate of Yen/USD to 118 would result in lower revenues for Mr. A in US because the purchasing power of USD has gone up. Effectively Mr. B will get only 1 USD for 118 Yen against the earlier rates ( 115 Yen = 1 USD) where he would have secured 1.02 USD for 118 Yen (118/115)

In order to mitigate the risk of volatility in exchange rates, the risk managers indulge in forward forex bookings.