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...

Find Another Essay On Summary- foreign exchange risk

Foreign Exchange Risk Exposure of Listed Companies in Pakistan

1422 words - 6 pages the case if its volume of exports falls. So Cristine (1981) describes the foreign exchange risk is the possibility of changes in the value of the company which arises from the potential for changes in foreign exchange rate. When a developing country like Pakistan is dependent on imports even to meet its demand for machinery, their parts and other goods for its local industries, then the devaluation becomes a curse. Siddiqui (2009) describes that


3041 words - 12 pages history. This worst situation of crisis is adversely affecting its local currency in addition to other real and monetary variables. Pakistan’s exchange rate changes more frequently than the exports and imports. The economy of Pakistan is experiencing slowdown in inflows as compare to outflows of foreign currency. Foreign exchange risk is the change in the value of the firm occurs due to the potential changes in currency exchange rate (Christine


2587 words - 10 pages Methodology Data The purpose of this research is to examine the foreign exchange risk exposure of listed companies on the Karachi Stock Exchange (KSE) over the period January 2005 to December 2009. The research uses different exchange rate measures namely; the rupee to US dollar, the rupee to UK pound sterling, and the rupee to the euro to determine the degree of exposure. The data for this study involved 40 listed firms on the Karachi Stock

Foreign Exchange Markets Summary

1331 words - 5 pages Money, Currency, Exchange, and Trade PAGE 1 Money, Currency, Exchange, and Trade:Gold Standard to Floating RatesAbstractMoney may make the world go around, but foreign exchange markets allow money to go around the world. International travel, studies, and business could not take place unless people had a way to assure they could securely enter into agreements to buy or sell whatever they wanted. A nation's currency must be able to be traded

What is meant by the term foreign exchange risk and explain and illustrate those strategies that are available to a multi-national enterprise to deal with such risk

2286 words - 9 pages In this paper I intend to introduce the relevant options available to a multi-national enterprise when dealing with foreign exchange risk. I am going to use Toyota Motor Corporation throughout as an example. Toyota is the world's third largest automaker. It was established in Japan on August 28th 1937 and apart from its 12 plants in Japan, has 54 manufacturing companies in 27 countries, employs 246,700 people and markets vehicles in more than

Foreign Exchange Markets Summary You have been asked by a local college to write a lecture that explains the gold standard and addresses the functions of the world's major foreign exchange markets

1332 words - 5 pages form of gold would present problems; there would be rampant use of gold coins. This would be problematic because there is an incredibly high risk of counterfeiting. In the process substandard coins would be created which could falsely represent their value.In summary, the foreign exchange market is a forum in which central banks, investment management firms, and commercial banks can benefit by trading their currency. The ideology of the gold

Report on Foreign Exchange market of Japan

2238 words - 9 pages Report on Foreign Exchange market of JapanTable of Contents3Executive summary 4Introduction 5Foreign Exchange Market of Japan 5Fluctuation in Yen "between" 2007-2009 9Determinants of Currency movements 12Forecasting Japanese currency Yen over 2010 14Conclusion 15References Executive summaryThis report provides an in depth analysis of Forex market trend of the Japan especially from 2007to 2009. The Forex market of Japan is very volatile i.e

International Business

806 words - 3 pages risks associated with international business, with an emphasis on the risk of foreign exchange rates. Country Risk When a business decides to become an international trader, one type of risk that must be examined is the country risk. When a company accepts or approves credit to a foreign customer, they are not only assuming the foreign company’s risk, but also the country’s risk. Country risk analysis means determining the country credit-worthiness

International Economic

3289 words - 13 pages ), Asian central banks have not diversified FX reserve greatly. As can be seen from the Appendix I Table 1, the share of the dollar in the currency composition of global foreign exchange reserves has barely changed since 1999.According to the article of Asian reserve (The economist 02/08/2003), it is also described "the risk to the high-reserve policy is a steep fall in the dollar. Most Asian central bankers still won't hear of this."As aforesaid, the

International Risk

637 words - 3 pages A corporation that operates in foreign countries must understand globalization and foreign financial risk. When a corporation operates on a global level, there are many financial risk factors that need to be taken into consideration. These risk factors include foreign exchange rates, differing interest rates from country to country, complex accounting methods for foreign operations, and foreign tax rates. To be successful at globalization

Macroeconomic Variables Affecting Exchange Rates for the US Dollar

2576 words - 11 pages 1. Introduction Exchange rates are the price of a country’s currency in terms of another country’s currency. For example, the Japanese yen is pegged to the United States dollar which is known as the USD/JPY exchange rate. This in turn, means that exchange rates have two components, the domestic currency and a foreign currency, which can be quoted either directly or indirectly. A direct quotation is the price of a unit of foreign currency

Similar Essays

Foreign Exchange Rate Risk Essay

1072 words - 4 pages When a company begins a transaction in a foreign currency, it accepts an economic risk due to fluctuating exchange rates. The globalization of the world economy and the devaluation of the U.S. dollar have allowed more American companies to enter the export/import markets. Additionally, many managers who previously avoided these markets are finding that international transactions can make their companies more competitive in marketing products and

Foreign Exchange Markets Summary Essay

1855 words - 7 pages Foreign Exchange Market PAGE 1 Running Header: FOREIGN EXCHANGE MARKETForeign Exchange Markets SummaryW2 AssignmentAxia College of University of PhoenixInstructor: Brian ButlerFebruary 3, 2008Foreign Exchange Markets SummaryIn view of the fact that the international business environment is not set up with a worldwide medium for exchange, the foreign exchange market is a necessity for international trade. The major functions of the foreign

How Companies Manage Their Foreign Exchange Risk

4063 words - 16 pages :// accessed on 14th November 2002) The profitability of Toyota's operations is affected by many factors including the changes in the value of the Japanese yen against other currencies which Toyota does business. The financial year for Toyota is from 1 April to 31 March.IMPACT OF FOREIGN EXCHANGE RISK ON OPERATIONThe value of the Japanese yen has fallen generally for the past three years against the dollar and the Euro

Risk Management And The Foreign Exchange Market

4993 words - 20 pages Risk Management and the Foreign Exchange Market2.1 Review of Foreign Exchange and Pricing ConventionsThe price of one currency expressed in term of another currency, or put another way, the exchange rate is the rate of one currency in terms of another.For example:AUD/USD = .6230which means that 1 Australian dollar will buy 62.30 US cents. In this example AUD is the commodity or unit currency, and USD is the terms currency. The commodity currency