Preview

Foreign Exchange Currency Risk

Powerful Essays
Open Document
Open Document
8925 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Foreign Exchange Currency Risk
International Financial Management

Foreign Exchange Risk Analysis

Assignment submitted by:

CURRENCY EXPOSURE

A currency exposure is any business operation whose profitability can be impacted by a currency exchange rate fluctuation.

Currency exposures assume many forms: they can be assets or liabilities; current or committed; contracted or merely forecast; they can be for trade, investment or balance sheet purposes. Cases of currency exposure can emerge at any point along the value chain, with various repercussions. Each requires a transfer of funds, and for each the rate of exchange is uncertain. Examples of different types of currency exposures are presented below.

FIGURE 1: CURRENCY EXPOSURES ACROSS THE VALUE CHAIN

Project planners calculate profitability based upon competitiveness in the target market.

Thereafter, a competitor in a third country benefits from favorable exchange rates between its currency and the currency of the target market. The exchange gap makes the competitor’s product more competitive. The product loses market share and ceases to be profitable.

Product manufacture relies on components or machinery purchased in foreign-denominated currency. A shift in exchange rates renders these purchases more expensive—in terms of home-country currency—and the product loses profitability.

|Development |Manufacture |Marketing |Sale |Accounting & | |
| | | | |Reporting | |
| | | | | | |

An unfavorable exchange rate movement renders products relatively more expensive in terms of the foreign currency.

The vendor must either maintain the

You May Also Find These Documents Helpful

  • Good Essays

    The exchange rate is the cost of one country's currency in provisions of another country's money. This risk frequently has an effect on organizations that export and/or import, however it can also influence on stockholders that may want to create international funds. For…

    • 903 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Companies need to think about foreign exchange and anticipate receiving a lower amount depending on the exchange rates of the foreign country.…

    • 307 Words
    • 1 Page
    Satisfactory Essays
  • Good Essays

    Rep Economics Quiz

    • 754 Words
    • 4 Pages

    5. When a country has a weak currency relative to other nations, imports are more expensive relative to domestic products.…

    • 754 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Answer: Exchange rates can either increase or decrease the price of a product that is being sold within another country. Credit becomes risky when you offer it to customers within another country. There is also a risk of more difficult to pursue another party that has a breached contract with you.…

    • 515 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    ii) Volume Risk: They have to buy foreign currency six months before keeping some predicted value of future sales in mind. If the actual value differs from the predicted one, there may be a chance of loss.…

    • 505 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Foreign exchange rates allow for fluid transactions to occur between people and businesses throughout the world. In principle, fluctuations in exchange rates are meant to equalize geopolitical imbalances, but they often affect local and national business environments. One of the most commonly affected industries is tourism, especially in a…

    • 1168 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Whilst popular opinion centres on the assumption that rising exchange rate has mostly positive effects on the economy, the impacts are both diverse and extensive. In the short run, a major implication is the improvement in the terms of trade as exports become more expensive and imports become relatively cheaper. This rise in the terms of trade leads a larger amount of imports to be purchased with a given amount of exports; an increase in the purchasing power of domestic production As a result of relative price fluctuations, there is likely to be an increase in domestic spending on imports, and decreased demand for exports in foreign countries.…

    • 2852 Words
    • 12 Pages
    Good Essays
  • Satisfactory Essays

    Target Canada

    • 412 Words
    • 2 Pages

    1. The risks that was associated with doing International business such as fluctuation in currency exchange and higher cost of doing…

    • 412 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    IFM11 TB Ch27

    • 3185 Words
    • 16 Pages

    Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company’s currency, will be worth less than was originally projected because of exchange…

    • 3185 Words
    • 16 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Chapter 9

    • 603 Words
    • 4 Pages

    5) ________ exposure is the potential for accounting-derived changes in owner 's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.…

    • 603 Words
    • 4 Pages
    Satisfactory Essays
  • Good Essays

    With regard to international trade, an exporter is cognizant of the fluctuations in exchange rates between his country and the country with whom he is doing business so as not to lose money; this exchange rate uncertainty is known as the foreign exchange risk. The fluctuations in the currency values between countries can affect profitability and cash flow for exporters. Exporters face a foreign exchange risk for many reasons, one of them being transactional; the difference in currency valuation on the date of the sale and the date of payment settlement. To explain further, lag times between invoicing and payment receipt can be between 30 and 90 days depending on negotiated terms according to the Export Council of Australia (2016). Only after a payment is received can the currency be converted and the gain or loss between values…

    • 770 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Assume that Acpana will need to transfer $200,000 US dollars to Canadian dollars on a regular basis, calculate the impact of these different hedging strategies against a naked position at:…

    • 735 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    All countries have different currencies because of this trade would have to be in two different ways according to that countries currency. The effect of the exchange of foreign prices is the worldwide rates put on products for the entire world. The universal rates of specific products is put in calculation as the cost of products to import equal to the rate of foreign products multiplied by the dollar of foreign currency. The calculations can suggest that when the exchange cost shift, this suggests that a shift in universal or global cost of products sent to import and export. The two different exchange rates are depreciation and appreciation. The depreciation of currency implies that the lowering in worth of the currency equal to different countries. The appreciation currency is the worth of a specific…

    • 358 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    exchange rates, and all of those economic factors have a major effect on the performance on…

    • 756 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Tiffany Case

    • 359 Words
    • 2 Pages

    (1) Define the risk source: the exchange rate flucturation, the cash flows of different currencies from asset change, account receivable and account payable.…

    • 359 Words
    • 2 Pages
    Satisfactory Essays