Starbucks and Foreign Exchange Rate Risk - Essay Example

Thus, a cup of coffee has priced at around Php150. This pricing has barely changed through the years. Starbucks has continuously opened stores in the country especially when the business processing industry boomed making specialty coffee shops really popular. Though the Philippine operation is just small in comparison to the whole system of Starbucks in the world, it does contribute to the company's sales and profits.

Since prices are denominated in Philippine pesos, the end-of-year revenues are converted into US dollars at the prevailing exchange rate which has important implications for the company. During 2005, the Philippine peso has steadily depreciated reaching Php55/US$1 (BSP 2008). So, for instance, if Starbuck's revenue is Ps5.5 million, it can be converted into $100,000 during the period. However, recently the currency has been strengthened through the continuous inflow of remittances from Filipinos working abroad who are supporting their families in the Philippines.

Thus, the exchange rate appreciated to Php45/US$1 (BSP 2008). In this situation, the Php5.5 million income can now be converted into US$122,222 higher than when the peso is weaker. This illustration just summarizes the exchange rate risks faced by a multinational business organization in operating in other countries especially where fluctuations are expected. Depreciation of the local currency is always detrimental to the parent company while appreciation improves total revenue as well as net income.