What makes a company more profitable when paid in foreign currency?

Let's say the company is based in the US, and the the currency of the US is weaker then its competiting currencies. As an example, let say the a company in the US in doing business in Australia where the currency is currently stornger than the US dollar. How would that make the the company more profitable?|||Mike isn't wrong, exactly, but I think there is a more direct answer.



Currency exchange can be the source of profits or losses for any company doing business in multiple currencies. Some companies hedge this risk so that it does not -- generally -- hit the bottom line, some partially hedge, and some do not hedge.



Just think of currency as a component part in the manufacture of the company's end product. An increase in price lowers the profits and a decrease increases it. The "primary" difference between currency and many other component parts is that it can be wildly volatile at times and is priced every single day by multiple independent sources. This is also true of things like cotton and oil, of course, but not usually true of widgets and wagon tires.



In more general terms, making profits in one currency translates into profits or losses whenever you convert that profit into another unhedged currency.|||It is primarily based on where the company manufacturers its products and where it sells the products.



As an example if a company manufacturers products in the US and sells the products in another country and that country's currency rises in relation to the US$, the American company becomes more profitable since the US company will normally set a price for the product in the local currency currency of that country and therefore the American company receives more US$ but has a fixed price for costs (employee cost, cost of manufacturing plant, etc.) in US$. Therefore the excess US$ received a mostly profits.



On the other hand if the US$ is stronger, profits will decrease since the company cannot remain competitive by raising the price of their products in the local currency to get the same number of US$.



Companies such as Boeing, Caterpillar, John Deer, Lockheed, and Archer Daniels Midland benefit greatly from a weaker US dollar and their foreign competitors suffer greatly when exporting to the US. A currency could weaken to such a point that it drives its foreign competitors out of business as was the case of the Japanese currency in the 1970s-1980s which was so weak that it drove many US and European companies out of business.



One way to get a rough estimate if a currency is overvalued is to check the "Purchasing Power Parity" of a currency. When a currency is at parity with another currency, costs are similar between the countries but as the currencies diverge, one country usually has a cost advantage over the other when competing to sell similar products (if wages for that industry are similar at parity between the two countries). As an example, it is now cheaper to build Japanese or German cars in the US instead of Japan or Germany. If the Japanese or German company does not have a plant in the US to build certain cars, their profits will suffer.



You can see from the chart in the following link that the US$ currently has a cost advantage of about 40% in relation the the Japanese yen and about a 20% advantage against the euro but is at a disadvantage to the Mexican peso and the Turkish Lira. In the case of Mexico and Turkey, parity doesn't necessarily indicate that wages are similar since a lot of the costs associated with a product in those countries are due to poor infrastructure, stifling bureaucracy, and a poor distribution system.



http://fx.sauder.ubc.ca/PPP.html|||The company sets its prices in each country. After that, if the currency fluctuates..as you describe, the AUD becomes stronger than USD. Then after they sell goods.. and send the money back to the USA, the AUD will convert to more USD.. and will make the US company look more profitable.