The effects of foreign exchange risk Introduction This paper discusses the effects of foreign exchange risk which arises due to fluctuations in currency rates.
Risk identification is a basic step needed to work out the financial, economic and societal impact on account of specific project or specific activity. The proper level of risk identification at appraisal stage supports to make proper choice of activities to be undertaken and the way it is to be performed considering the constraints of resources.
The assessment of the risks associated with an activity is known as risk analysis.
Risk analysis always looks for quantification of risk in terms of their effect on cost, time or revenue. Risk analysis can be done through the measurement of risk component and its effects on the economic and commercial feasibility of the project or activity.
Once the risk analysis is done, it is needed to work out the strategy to cope up with the risk position.
The response to the risk can be done through numerous ways. Following is the illustrative list of risk response techniques: Exchange risks essay Avoidance or Reduction ii. Risk Transfer and iii. Risk Avoidance or Reduction: Risk avoidance is not considered as a wise technique, because in this technique, firm would like to take an action like not holding an asset or liability.
In the case of risk reduction, firm adopts conservative course of action like application of hedging technique. Under such technique, firm transfers the risky assets or liability to the party who is willing to take the risk. The counter Exchange risks essay who is willing to take the risk will be paid upfront at the time of entering in to contract premium by the firm who wants to transfer the risk.
Under this method, the firm is prepared to face the consequences of the risk situations with regards to assets or liabilities. The management of the firm has to develop the proper risk response strategy by considering the long-term corporate objectives of the firm.
Approaches for Managing and Reducing Risks: After the different types of risk are identified; business managers are involved in the identification of the alternative approaches and ways to manage and reduce the risk. Those available approaches are as under: A firm will try to avoid the risk by adopting a strategy like not to hold such asset or liability, which may results in to financial risk, exchange risk, volatility risk, or political risk, etc.
The firm will not hold the foreign assets or liability in foreign currency those are prone to foreign exchange risk. Such type of approach is not acceptable by business managers, because such approach suggest to not to do any operating activities. Generally, the firm will should try to accept and find out the way through which the loss can be prevented or probability of loss can be reduced.
For this purpose, generally firm takes the insurance policies or enters in to different types of hedging transactions. Under this approach, firm will not concentrate all their assets at one place or country.
The loss can be reduced by firm by establishment of plants, and assets at different locations. The core operating assets, those are needed for routine and regular business activities, are placed and located at multiple locations.
In such situations any type of risk emerging situations will support to reduce or minimize the risk of business in case of economical slow down or political risk in a particular country.
As we understand, by establishing the plants at different locations, the operating and monitoring costs of firm will increase, but on the other way it supports to reduce the risk of the business. This separation technique is useful for physical assets only. The separation technique is applicable for physical assets, while the spread technique is applicable to the financial assets.
The spread concept is based on the old adage of not putting all the eggs in a single basket. In this approach, the financial assets are distributed over a number of issuer to minimize the risk of default by one of the party.
In this approach, the firm transfers the risk to others who are willing to take it. The transfer of risk can be done by three ways: In this way, the specific asset or liability prone to risk, are transferred. In this approach, the assets or liabilities are not transferred but only the risk is transferred.
It is generally done through the forward contracts and swap contacts. For example, for receivables in foreign currency on account of export sale, firm can enter into forward contract with bank.Daimler hedged most of the risks arising from fluctuations in currency exchange rates during the year with the use of suitable financial instruments.
For the US dollar and the British pound the hedging ratio is 60% while for the Japanese yen it is even higher. This paper discusses the various foreign exchange risks faced by multinationals around the globe and the necessary steps taken to manage these risks. A study on the . Foreign exchange risk is the exposure of an institution to the potential impact of movements in foreign exchange rates.
The risk is that adverse fluctuations in exchange rates may result in a loss in British pound terms to the institution.
The challenging issues in international business within the 20th and 21st century are currency and exchange rate risks. In the late 20th century, for instances, it has been clear that exchange rate risks considerations are critical for business survival. Foreign exchange risk is the exposure of an institution to the potential impact of movements in foreign exchange rates.
The risk is that adverse fluctuations in exchange rates may result in a loss in British pound terms to the institution. This paper discusses the effects of foreign exchange risk which arises due to fluctuations in currency rates.