Global Business : Managing Foreign Exchange Risk

The Balance of Payments in India mainly relies on services exports, remittances and the course capital flows, both foreign direct investments (FDI) and FII. It is very essential that all market participants, such as banks and other intermediaries be provided with the wherewithal so that they can undertake a risk management in a way that is scientific. One of the ways to access domestic, foreign exchange markets is to hedge on the underlying foreign exchange exposures. In addition, the facilities that are available as the booking of forward contracts were included in the domestic forex market in order to evolve and acquire volumes and depth (Sumanth, 2012). Some of the newer hedging instruments have put in place swaps and options in the

Exchange rate risk, also called as ‘currency risk’ is the risk arising from currency fluctuations. Volatile exchange rates can reduce cost and productivity advantages gained over years of hard work. Firms exposed to international economy face this risk. When a firm has already committed to a foreign currency denominated transaction, the firm is exposed to a exchange rate risk. The firm will incur a

2) Minimize the cost associated with the foreign exchange risk management strategy, i.e. the management and hedging costs

The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which

Andrew Marshall's paper Foreign exchange risk management in UK, USA, and Asia Pacific multinational companies has the a stated objective "to simultaneously survey the foreign exchange risk practices of large UK, USA and Asia Pacific multinational companies (MNCs). The author seeks to determine of foreign exchange rate risk management policies vary internationally.

Financial hedging is the use of hedging instruments - typically FX forwards, options and swaps - that are sold by foreign exchange brokers and banks to reduce company exposure to currency fluctuations. (Export Development Canada, 2016) Acknowledging that foreign exchange risk is a real threat to corporate cash flows, assets and expenses can be one of the biggest hurdles for most companies. However, recognizing the importance of protecting assets companies can move forward in identifying the type and magnitude of the risk to implement strategies to mitigate them. The three most common types of foreign exchange risks are:

AIFS wants to offset any change in the exchange rates that may adversely affect their profit margins by using currency forward contracts and currency options. These hedging activities work to offset the three types of risk defined above as bottom-line risk, volume risk, and competitive pricing risk. Since these hedging activities must be put in place two years before the actual year of sales, AIFS must decide the proportion and cost

The starting point of any foreign exchange risk management plan is to identify the exchange exposure faced. In controlling the foreign exchange risk, currency options have attained acceptance as very helpful tools due to their exclusive nature. They are very critical and convey a much wider range of hedging alternatives. Call options provide the right to the buyer to purchase the

Due to the geographic diversity of countries where BHP Billiton has extended to, the variation of foreign exchange rate obviously plays a crucial role on its financial performance. According to the annual report of BHP Billiton (2015), US dollar is not only the functional currency utilized in majority of sales and transaction, but also the presentation

Hull J C. Optionsfuturesand other derivatives seurities.3rd ed. Upper Saddle River: Prentice-Hall199749-141Brealey R, Kaplanis E. Discrete exchange rate hedging strategies. Journal of Banking and Finance, 1995, 19:765-784(Briys E, Solnik B. Optimal currency hedging

Multinational corporations often sell products in various countries with prices denominated in corresponding local currencies. It is widely recognized that as the volatility in exchange rates has increased dramatically after the breakdown of the Bretton Woods system of fixed exchange rates (Smith, Smithson and Wilford, 1990), multinational corporations may have become increasingly vulnerable to exchange risk since the short term movements in exchange rates are often not accompanied by offsetting changes in prices in the corresponding countries (Shapiro, 1992). Exchange rate exposure is an important source of risk for multinational corporations such as transaction exposure, economic exposure, and translation exposure. Thus, managers of multinational firms employ a number of foreign exchange hedging strategies in order to protect against exchange rate risk. The primary reason companies would hedge foreign exchange risk is so that they do not want to lose money on capital or assets they have stored in different

Risk is an inherent aspect of every business activity and its effective management can determine the success or failure of a company. Companies dealing with foreign currencies are at a risk of significant losses caused by fluctuations in the exchange rates. The American Institute for Foreign Study (AIFS) operates in more than one currency and this exposes it to currency risks. The company incurs its expenses in dollars but receives its revenue in other currencies and, therefore, adverse fluctuations might result in huge losses to the company. The company employs a hedging strategy as its core approach to risk management. Hedging involves entering into contracts that lock up exchange rates in future so that a company obtains its revenues or makes payments in constant exchange rates despite fluctuations. By hedging its currency risks, AIFS is able to avoid losses that result from huge fluctuations in currency exchange rates. However, the company has to pay a commission for the hedging as compensation to entities that assume this risk. AIFS has employed two primary methods of hedging: currency forward contracts and currency options. Forward contracts are agreements that give an entity a right to exchange specified amounts of one currency for another at pre-determined exchange rates in a future date. On the other hand, options give the holder a right but not an obligation to engage in

But, even though the possibility of winning exists, the company is exposed to a greater risk if it does not hedge. Moreover, the policy of the company is to ensure against the risk, not to speculate on the foreign exchange market.

Intel utilizes currency hedging. As we know, the market conditions in different parts of the world can be poles apart from the conditions in USA. Thus, to minimize currency risk in non-U.S. dollar denominated financial investments, Intel uses forward contracts and currency interest rate swaps. These programs buffer the impact of currency exchange movements.

Great Eastern Toys is a company in Hong Kong that exports a huge percent of its total sales to the North American and European markets and hence is exposed to currency risk. Previously, the company was occupied with expanding their business and the company 's management had never given much attention to currency risk until their recent meeting with their banker. The banker pointed out that the depreciation of the European currencies during the previous two years had resulted in a substantial loss of income. The company 's management was indeed convinced that they should begin to devote more time and manage their currency position. In this report, we are going to explore the different options for Great Eastern Toys to hedge