Summary Foreign Exchange Risk Essay

1237 words - 5 pages

Summary - Foreign exchange riskl Brief statementThe exchange rate stated simply is the price of one currency in terms of another currency. Exchange rate can therefore be expressed in terms of the law of one price which states that "in the presence of a competitive market structure and the absence of transportation cost and other barriers to trade, identical products which are sold in different markets will sell at the same price in terms of a common currency" (Pilbeam, 1992). Importers and exporters are exposed to the fluctuation in foreign currency (FC) exchange therefore undergoing business risks as they operate mainly in international markets. They are, in global market terms, therefore affected by the fluctuation mainly in the value of the US dollar, the Euro and to a lesser extent the British pound, and other foreign currencies. In principle, in the normal course of doing business, importers and exporters employ derivatives financial instruments, including forward contracts and foreign currency options to manage their exposure to fluctuation in foreign currency exchange rates. To take New Zealand importers and exporters for example, the value of the NZ dollar has raised generally for the past three years against the US dollar and the Euro though there had been periods of fluctuations. Changes in foreign exchange rate affect NZ participants' revenue, gross margins, operating costs, operating income, net income and retained earnings. In addition, there are some other important approaches to contribution to hedge or control foreign exchange risk, including using a value-at-risk analysis ("VAR"), leading and lagging, netting, back to back loans, natural hedging and so on. For either existing or potential participants of international import and export, how to evaluate the foreign currency risk and implement effective risk strategic management to minimize exposure is critical.l Comments regarding the key researcher in the areaThe identification of importance of effective foreign exchange risk management for importers/ exporters minimizing exposure as they deal with international trade have been discussed by many researchers in the international business literature. Here, I would like to introduce a key researcher who made tremendous contribution in relation to the area of strategic governance.Kit pong wong is an important researcher in the area of international foreign exchange rate and serves Business School of the University of Washington. Kit's contribution to this area is to develop the expected utility model of importers/ exporters facing exchange rate risk exposure to the foreign currency cash flow. He has published several influential papers in some famous scholarly journals such as Journal of Financial and Quantitative Analysis, International Economic Review, Journal of Futures Markets etc. In 1999, Kit and another researcher-Udo Broll wrote an important paper in relation to this topic, which is Multiple currencies and hedging where the...

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