Exhange Risk Faced by Multinational Companies. Essay examples

1633 WordsApr 22, 20027 Pages
Exchange Rate Risk. "Exchange rates are the amount of one country's currency needed to purchase one unit of another currency (Brealey 1999, p. 625)". People wanting to exchange some money for their vacation trip will not be too much bothered with shifts if the exchange rates. However, for multinational companies, dealing with very large amounts of money in their transactions, the rise or fall of a currency can mean getting a surplus or a deficit on their balance sheets. What types of exchange rate risks do multinational companies face? One type of exchange risk faced by multinational companies is transaction risk. If a company sells products to an overseas customer it might be subject to transaction risk. If a UK company is expecting…show more content…
This idea goes hand in hand with the economic risk. Changes in a country's interest rates affect the whole business environment in that country. Increased interest rates are likely to make people spend less money, so the income of companies goes down. Methods of mitigating exchange rate and interest risk. A company has lots of options trying to safeguard against interest and exchange rate risks. The company could do nothing and hope the market evens itself out. Rise of some country's economy might mean that another country's economy is falling. To avoid being exposed to exchange rate risk a company might decide to transfer the risk over to its overseas customer by making the customer pay the exchange rate difference from the date a deal was being made. The effect of this could be that the company looses its business partners. However, most companies practice internal hedging to safeguard against exchange and interest rate risks. A company can buy forwards, which enables a company to freeze the price at which it buys its currency at the end of the agreed period. For a company buying from a foreign company, this method will eliminate all exchange risk totally. If a company has a payment due in two months, it could buy the foreign currency at spot rate straight away and invest the money until payment due. The company will then be sure to have enough currency to go through with the payment, plus surplus from the investment. A third

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