Global Business : Managing Foreign Exchange Risk

752 Words Sep 28th, 2014 4 Pages
Global business today is subject to various kinds of risks. One risk that global business needs to handle is the foreign exchange risk. Foreign exchange risk is the risk when companies face a potential gain or loss due to the fluctuation of an exchange rate change. Companies can be subject to a significant financial loss, even with a small change in the exchange rate. Thus, the primary purpose of managing foreign exchange risk is to mitigate potential currency losses. There are at least three strategies companies use to manage their foreign exchange risk. They are forward contracts, currency swaps and “natural” hedges. Companies like Airbus, Tohoku Electric Power Company and Toyota utilized these strategies to reduce potential currency losses.
Companies can hedge against foreign exchange risk by using forward contracts. Forward contracts allow companies to sell or purchase foreign currency at a future time and a given exchange rate. Regardless of any fluctuation of the exchange rate on the foreign exchange market, the transaction takes place at a time with the fixed exchange rate. Companies can mitigate the risk of the exchange rate fluctuation and increase management’s control over their cash flows and profit.
Another way to hedge against foreign exchange risk is by applying currency swaps. A currency swap involves two parties that exchange the principal and interest payable on it with one another in order to gain exposure to a desired currency (Tewari, 2013).…

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