Foreign Exchange Risk Essay

Currency risk is the potential risk of loss from fluctuating foreign exchange rates when an investor has exposure to foreign currency or in foreign-currency traded investments.

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

Aspen has become a public company withmore risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that

Our team has written this briefing note in order to inform you of the risks associated with fluctuations in exchange rates and how that risk relates to our organization; Coca-Cola Enterprises Inc. (CCE).

12. For a firm that deals in international markets, what does "foreign exchange risk" mean?

Selling in foreign currency implies that some time period before a contract is agreed upon, there will be a quoted price for the goods using an exchange rate that appears appropriate (Gray, 1999). However, economic events have a habit of upsetting even the best-laid plans. Therefore, one may want to have a strategy for dealing with exchange rate risks.

This report is based on a practical scenario solution of General motors. The report addresses the problem given in scenario which is the change in policy of hedging with detailed reasoning. The report then looks at the different available hedging instruments to the firm. Profitability of both instruments has been compared and lowest cost option was selected to mitigate the transactional risk. Translation risk has also been seen at different hedging ratio levels; current one and the proposed one. The options were more profitable to the firm that has been recommended. Argentinean subsidiary’s

Currency hedging involves deliberately taking on a new risk that offsets an existing one, thereby reducing a businesses' exposure to negative change in exchange rates, interest rates, or commodity pricing (Economists.com, n.d.). "Currency hedging allows a business owner to greatly reduce or eliminate the uncertainties attached to any foreign-currency transaction" (Fraser, 2001). It is impossible to predict the how much a currency will be worth on the exact day that a company will be converting it. With hedging, the uncertainly is gone. Many companies that have international operations are constantly juggling multiple transactions, with

There is a large set of literatures about pros and cons of hedging. The first advantage of hedging is minimizing foreign exchange rate risk. Firms will increase their use of foreign exchange derivatives to hedge against the negative effects of currency risk directly related to their operations (Menon, S., & Viswanathan, K. G., 2005). Exchange rates risk is one of the major problem that face by the non- financial companies. Changes in exchange rate will influence volume of foreign trading, the costs of foreign purchasing, profile and the structure of foreign markets in which the company operates in the long run effect. Exchange rate changes could affect profit margins, through their effect on sources for inputs, markets for outputs and debt, and the value of assets (Papaioannou, M. G., 2006). The operational hedging appears to be robust to increased exchange rate volatility suggests that firms without (or with limited) operational hedges should carefully consider the possibility of using this more robust protection against foreign exchange risk (Hutson, E., & Laing, E., 2014). So, the hedging can be used as a risk management tool by the investors to minimize the foreign exchange risk.

The disadvantage of global market strategy is the exposure to currency risk. Currency risk is a form of risk that arises from the changes in the valuation of currency exchanges. Gains or losses can be arisen from the changes of foreign currencies. MM Co. is highly exposed to currency risk as it exports its products to many countries and trades in currencies other than its home currency. To mitigate the currency risk, MM Co. applies for Target Redemption Forward (TRF) with its bankers in order to lock the foreign currency exchange rate between US dollar and Malaysian Ringgit at higher levels.

Telefnica, a Spanish telecommunication company, faced the exchange rate risk. Foreign currency risk primarily show up in connection with1. The international presence of Telefnica, and the investment and businesses in other countries, such as Latin America, use other currencies, not the euro. 2. Liabilities denominated in currencies are different with its own country, and this debt is not likely to be conducted. At the same time, the thing of depreciation in foreign currencies relative to euro, and the value of cash flow has a loss in such currencies. However, this loss is offset by the reduction in the euro value of liabilities denominated. The level of exchange rate hedging was changed by the type of investment. In 2011, Telefnicas net debt was equivalent to about 7,953m euro in Latin America(Telefnica 2011). However, its currencies in which this debt is denominated is merged in percentage to the cash flow of each currency. the above hedge of exchange rate risks whether effective or not relies on which currencies depreciate relative to euro. In order to avoid decrease of the Latin America currencies relative to the euro, Telefnica group use the dollar-denominated debt. For instance, in spain, this is linked to an investment when it is suggested to be an effective hedge or in its own country. Meanwhile, the remaining exchange rate exposure on the income statement will be limited by the Telefnica Group to manage the exchange rate

1. Fluctuation in exchange rates: Exchange rates of currencies of different countries fluctuate continuously and in a very random manner with the change in the demand and supply state of the concerned currency. That can translate the profit from the international business transaction into a loss or vice-versa. Thus, the exporters dealing with foreign receivables should be conservative to avoid this risk.

Secondly, short term currency movements seemed to be strongly affected by “speculative force”, in comparison with other determinant such as economic

In the current global economy, US Corporations are able to expand outside of its national border to trade with and invest in foreign companies. These international business dealings open domestic companies to more business opportunities, but also require more sophisticated knowledge of foreign economies, cultures, and policies. In particular, business must be aware of how the US dollar relates to the foreign business’ functional currency. In a market where exchange rates fluctuate daily, risk related to the foreign exchange rate must be considered.

The Woolworths has transactional currency exposures arising from the acquisition of goods and services in currencies other than its functional currency. This creates a risk to business expansion but also have an impact on the growth in other departments. It is the Group‘s policy that business units entering into such transactions must cover all such exposures with forward exchange contracts to hedge the risk of fluctuation in the foreign currency exchange rate (refer to the accounting policy note on hedge accounting). Forward exchange contracts and trade payables at year-end.