Yahoo Finance's Julie Hyman breaks down how the strength of the U.S. dollar impacts corporate earnings in this week's Yahoo U.

Video Transcript

BRIAN SOZZI: All right, earnings season is just beginning here, but we've already heard several executives talk about the impact the strength of the dollar has had on the top and bottom lines. The dollar has been on a tear, having its best quarterly performance in seven years. But why exactly does this impact companies? And how can they hedge against it? Professor Julie Hyman is here for her debut of Yahoo U. Julie, take it away.

JULIE HYMAN: All right, take your seats, gents, because class is, indeed, in session. We have seen this enormous strength in the dollar this year. We've been talking a lot about it. It has meant about a 14% rally for the dollar versus the likes of the euro, a 30% rally versus the Japanese yen. And if you look at the year to date, you've seen the dollar index versus a basket of currencies go higher.

What does this mean in real terms? Well, let's say I had a company called Jules' Tools. I sell all kinds of stuff-- screwdrivers, hammers, power drills, what have you. Let's say I have a big business in the EU. And I sell 1,000 euros' worth of hammers in the European Union. Well, if you go back to March, that sale-- well, if I brought it back to profits here in the US, would be worth about $1,112.40. However, as of yesterday, it was worth less than 1,000 bucks, $985 or so.

So this tells you, in real terms, when you bring those profits back to the United States, what happens? It's the inverse of you going to vacation over in Europe and having more power to spend there. So a lot of companies have already talked about this effect, right? You've already heard so many during this earnings season thus far from the Netflixes and Procter & Gambles of the world, for example. Procter & Gamble, for example, saying that it's going to take a hit of $3.9 billion over the next year.

I forgot that I control this, and you don't. So here are the various companies that we're seeing here, guys. Tesla one of the companies also talking about the currency impact. Netflix making these kinds of comments as well, that it's really costing these companies billions of dollars as we're seeing the currency effect. And most of the currency strategists we've spoken to are saying the dollar is going to continue to go up. So this is not something that's over.

So what can companies do in order to try and hedge against the dollar strength? That's something we hear about frequently, this hedging activity. There's a couple of things we can do. Jules' Tools can pay workers in local currency. In other words, if I have workers in the European Union that are making those hammers, I can just keep the euros there and pay the workers in that currency. I don't have to bring it back to the United States. So that's one way that I can do it.