Extreme foreign exchange rate fluctuations
Fluctuations between countries’ Foreign Exchange Rates can wreak havoc on the most accurately predicted payroll expenses. For example, if a business has employees in a foreign country, that business will generally have an accurate estimate of the number of employees in that foreign country, and how much each employee costs the firm, in terms of their payroll expense. The $600 net expense is the cost of reducing foreign currency exchange rate risk. By establishing a risk-management policy that locks in foreign currency exchange rates at the transaction date through hedging, the company becomes financially indifferent about foreign currency exchange rate fluctuations because it has mitigated the risk. With equalization, the expat salary is fixed at a rate based on the home currency, rather than the local, foreign currency. So, if the exchange rate fluctuates such that the worker receives a lower payout in local currency, they will have to adjust their local living expenses and budget, which may seem like an unfair burden of the work assignment.