Foreign Exchange Risk Management
1.0 Introduction 1
1.1 How do we identify exposure 2
1.2 Company’s activities that causes exposure 3
2.0 The Effect of Exchange Rate Changes on 8 Operational Cash Flow
3.0 Guidelines for corporate forecasting of foreign exchange rates 10 - Fundamental forecasting 11 - Technically forecasting 14
4.0 Tools and instrument for managing foreign exchange risk 17
5.0 Non-derivative hedge of foreign exchange risk management 20
6.0 Conclusion 25
7.0 Reference 26
1.0 Introduction
We have chosen Foreign Exchange Risk Management as the topic of our report. We chose this topic as it is closely related to our field of study, which is in the Finance and Investment sector. In this field, we are most likely required to analysis the risk involved in certain prospects of a company’s objective to increase its value and expand to a greater market, before pursuing to any projects, major or minor, by the firm. Moreover, it is vital for us, as investors, financial analyst and such profession to be aware of not only the risk involved but also how to hedge against it, avoiding losses.
In this report, we will discuss about the foreign exchange risk and its impact to a firm. Exchange rate risk is the changes in investment’s value due to the changes or fluctuation of the currency exchange rate. This will affect firms who are doing export or import business and international investment. It is because currencies have to be converted when doing these business. If the exchange rate is uncertain, it will cost the firm.
There are a few factors that cause the exchange rate to fluctuate, such as the differential in interest rate, differential in inflation rate, current account deficit and etc. In our report, we will explain about the relationship of interest rate, inflation rate and the movement of exchange rate by using economic theory such as Purchasing Power Parity (PPP) and the
1.1 How do we identify exposure 2
1.2 Company’s activities that causes exposure 3
2.0 The Effect of Exchange Rate Changes on 8 Operational Cash Flow
3.0 Guidelines for corporate forecasting of foreign exchange rates 10 - Fundamental forecasting 11 - Technically forecasting 14
4.0 Tools and instrument for managing foreign exchange risk 17
5.0 Non-derivative hedge of foreign exchange risk management 20
6.0 Conclusion 25
7.0 Reference 26
1.0 Introduction
We have chosen Foreign Exchange Risk Management as the topic of our report. We chose this topic as it is closely related to our field of study, which is in the Finance and Investment sector. In this field, we are most likely required to analysis the risk involved in certain prospects of a company’s objective to increase its value and expand to a greater market, before pursuing to any projects, major or minor, by the firm. Moreover, it is vital for us, as investors, financial analyst and such profession to be aware of not only the risk involved but also how to hedge against it, avoiding losses.
In this report, we will discuss about the foreign exchange risk and its impact to a firm. Exchange rate risk is the changes in investment’s value due to the changes or fluctuation of the currency exchange rate. This will affect firms who are doing export or import business and international investment. It is because currencies have to be converted when doing these business. If the exchange rate is uncertain, it will cost the firm.
There are a few factors that cause the exchange rate to fluctuate, such as the differential in interest rate, differential in inflation rate, current account deficit and etc. In our report, we will explain about the relationship of interest rate, inflation rate and the movement of exchange rate by using economic theory such as Purchasing Power Parity (PPP) and the
References: * UKessays, 2011. Foreign Exchange Risk Management. Viewed on 10 March 2013. Available from : <http://www.ukessays.co.uk/essays/strategic-management/foreign-exchange-risk-management.php> * Financial Times, 2012 * Lan H.Giddy, 2011. The Management Of Foreign Exchange Risk. Viewed on 9 March 2013. Available from : <http://people.stern.nyu.edu/igiddy/fxrisk.htm> * Investopedia, 2013 * Wikipedia, 2013.Currency swaps. Viewed on 12 March 2013. Available from: <http://en.wikipedia.org/wiki/Currency_swap> * Wikipedia, 2013 * Forex-exchange-rates.com, 2012, Technical Analysis in Exchange Rates, viewed on 14 March 2013. Available from : <http://forex-exchange-rates.com/importance-technical-analysis-exchange.html>