Risk Management Associated With Foreign Currencies

There are lots of methods to solve the changes in foreign currency and interest rates issue, however, derivative financial instruments are the major tunes Nike enterprise has used to tackle this issue. Despite the fact that this approach does not wipe out comprehensively the risk of foreign exchange, Nike enterprise still utilize it to minimize or delay the negative consequences. Specifically, the derivative financial instruments comprise embedded derivatives, interest rate swap, and foreign exchange forwards and options contracts (Nike annual report, 2014).

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

IntroductionThis report is to check the hedging strategy that was used and lead to the huge loss of CITIC Pacific Limited and point out the importance of managing foreign exchange exposure through select appropriate hedging strategies. The huge loss of CITIC Pacific Limited and its cause is discussed in the first part. The importance of hedging and the tools of hedging are respectively reviewed in part two and part three. Finally, suggestions are given out on how to design proper hedging strategies for different enterprises.

Then, we took into consideration only a fluctuation of the exchange rate. The scenarios that we analyzed covers different positions of the dollar against the euro: weak dollar (USD 1,48/EUR), stable dollar (USD 1,22/EUR) and strong dollar (USD 1,01/EUR). Different coverage of costs with hedging was also introduced in the analysis. The three main policies are of not hedging, 100% hedging with forward contracts and 100% hedging with options.

In September of 2001 General Motors (GM) was faced with a billion dollar exposure to the Canadian dollar. At the time, North America represented approximately three-quarters of GM’s total sales and this large exposure to the CAD could significantly affect GM’s financial results. GM had a passive strategy of hedging 50% of its exposure; this paper explores the impact of hedging 75% of the exposure.

After conduction an analysis, it shows that the fluctuations in exchange rate could cause a lot of trouble for GM. Hence, it reverts back to the issue of GM’s expectations of the future spot exchange rate. From this, they can then determine which hedging method is more

Aspen has become a public company with more 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

So, in order to prevent the price difference we gained getting eroded from short term or even long term exchange rate volatility, we will need a stable currency market on our back so that our revenue won’t fluctuates significantly every year. However, the currency market is the most volatile market on earth, it will never be stable. And it has come to my attention that due to the huge fluctuation of some currencies’ value, our cost of purchasing goods in some countries has been increased significantly. Moreover, I realized as a new formed company, we don’t have a very matured hedging strategy to offset our currency exposure, also cost of strategy we currently implemented in

Exposure risk managers can hedge exchange rate risk with either currency futures or currency options. It is generally suggested that hedgers should choose a hedge instrument that matches the risk profile of the underlying currency position as closely as possible. This advice, however, ignores the possibility that the hedging effectiveness may differ for the alternate risk management tools. This study compares the effectiveness of currency futures and currency options as hedging instruments for covered and uncovered currency positions. Based on Ederington 's (March 1979) portfolio theory of hedging, the results show that currency futures provide the more effective covered

IOI Corporation Berhad can use hedging in order to mitigate the foreign exchange risk. IOI can hedge the foreign exchange through spot contract, forwards or future contract, option contract and swap. The spot contracts fix exchange rate against fluctuations and the company might not be able to get benefit but also no get loss in spot contract even loss also just lose a little money. Besides that, IOI can offset foreign currency holdings with futures and forward contracts. A forward contract is a transaction in which the delivery of the commodity is postponed until the contract has been made. The delivery is often in the future, however, the price is well determined in advance. Hedging is the act of taking an offsetting position in a related security. A perfect hedge can reduce risk to nothing except the cost of the hedge. Furthermore, IOI can use option contract to reduce foreign exchange risks. Just like stocks, currencies have calls and puts that allow buyers to buy or sell the financial asset at a predetermined price during a certain period of time or on a exercise date. Lastly, IOI can use swap to to mitigate the foreign exchange risk. The company could swap to take advantage of the lower

Currency options is a contract which shows or grants right to buy or sell currencies at a date; however, it is not an obligation to buy or sell the currencies in order to hedge against negative changing in exchange rates. When the option is bought on an exchange, it is done on the over the counter market (OTC).

“Volatility would lead to a higher trading volume of currency options because of the higher potential gains and losses associated with greater exchange rate .Volatility and the resulting rise in risk management and speculative activities using options (Tan, 2000)”.

The main consequence of an exchange rate fluctuation for international trade is the risk for an exporter or an importer that the cost of foreign currency applied in business volumes will differ from the hoped and calculated. An exposition to foreign currency and a currency risk can make additional profits, and not just losses. However, being in an exposition to currency means relying on a case and most of businesspersons prefer not to allow their company being sensitive to unexpected changes. Therefore, the entities find methods of minimizing or complete elimination of exposition to foreign currency to plan business transactions and to predict profit more authentically (Frieden & Lake 20).

Evidence from statistical tests suggesting a significant impact of foreign exchange gains and losses on profitability corroborates comments from the financial statements of sample companies for this research. However, this evidence is unlike those of Lee and Suh (2012) who argued that “exchange rate changes explain less than 2% of the variation in foreign operations profitability for most industries and the impact of exchange rate changes on profitability is not significant’’. This conclusion was reached after an empirical study involving 11 different industries. The results of this research are also dissimilar to those of Pantzalis et al. (2001) who finds that only 15% of 220 multinational companies in the US evidence exchange rate exposures that are statistically significant. Evidence from these other studies are also similar to those of most studies conducted using multinationals (Bartov and Bodnar 2012; Griffin and Stulz 2001; Muller and Verschoor 2006). The lack of significant exposure as highlighted by these studies have been ascribed to the hedging activities adopted by Multinational companies to reduce the impact of foreign exchange exposure (Allayannis and Ofek 2001; Lee and Suh 2012).