StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

Foreign Exchange Rates and Exchange Rate Risk - Essay Example

Cite this document
Summary
International transactions therefore are not incurred in the local currency of the organization and hence firm has to rely on foreign…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93.9% of users find it useful
Foreign Exchange Rates and Exchange Rate Risk
Read Text Preview

Extract of sample "Foreign Exchange Rates and Exchange Rate Risk"

Download file to see previous pages

The rates therefore are either determined through the market forces or by the central bank of the country to maintain and manage them at a reasonable level. It is also important to understand that when global firms deal in foreign exchange they also expose themselves to various risks. Every firm which deals in foreign currency therefore have to fact these risks and use different hedging methods. These methods vary depending upon the needs of the organization as well as the nature of the transaction.

It is however, critical that each firm has to face these risks and must also manage them in order to avoid losses or reduce the risks and manage it at acceptable level. An exchange rate is the rate at which one currency is actually converted into another currency. It is also the value of currency of one country in terms of the value of the currency of another country. The value of two currencies is mostly determined in the open market in which many buyers and sellers actually determine the value based upon overall demand and supply of each currency.

It is important to note that there are usually 2 types of exchange rates i.e. spot rates and forward exchange rates. Spot exchange rates are the rates which are offered on the spot for the buying and selling of any particular currency. However, forward exchange rates are determined for the currencies to be purchased or sold in given future date. When international organizations actually receive their payments in foreign currency, they contact foreign currency dealers to offer them either spot or forward rates.

Foreign currency dealers however, always quote two different rates i.e. the rate at which the dealer will buy the currency and the rate at which he will sell the currency to the organization. The difference between the bid and ask price (buying and selling price) is considered as the

...Download file to see next pages Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Foreign Exchange Rates and Exchange Rate Risk Essay”, n.d.)
Retrieved from https://studentshare.org/business/1605696-foreign-exchange-rates-and-exchange-rate-risk
(Foreign Exchange Rates and Exchange Rate Risk Essay)
https://studentshare.org/business/1605696-foreign-exchange-rates-and-exchange-rate-risk.
“Foreign Exchange Rates and Exchange Rate Risk Essay”, n.d. https://studentshare.org/business/1605696-foreign-exchange-rates-and-exchange-rate-risk.
  • Cited: 0 times

CHECK THESE SAMPLES OF Foreign Exchange Rates and Exchange Rate Risk

Foreign Exchange Market

Interest rate risk, when an investor uses a margin he would be paying interest rates if he looses.... Say for example, the exchange rate of PESO/US$ on November 2, 2007 is 43.... We also have the exchange rate.... As it may lead to profitability it also eposes an investor to certain risks including exchange rate risks, that the currency he has may not regain its high value.... foreign exchange Market is a market where people trade in money of different currencies (Schenk, ____)....
2 Pages (500 words) Essay

Starbucks and Foreign Exchange Rate Risk

14 December 2008 Starbucks and Foreign exchange rate risk Starbucks Corporation is a specialty coffee retailer famous globally because of its unique business model anchored in the provision of a third place for customers aside from home and workplace.... Since prices are denominated in Philippine pesos, the end of year revenues is converted into US dollar at the prevailing exchange rate which has important implications for the company.... Thus, the exchange rate appreciated to Php45/US$1 (BSP 2008)....
1 Pages (250 words) Essay

Managing Interest Rate and Exchange Rate Volatility

Transaction reflects the firm's risk to exchange rate movements regarding... The figure above is an indication of how interest rates and business cycles are related in Thailand.... Therefore Junor Plc is likely to face decreases in demand for its products during a period of the high interest rates and increases in demand during lower interest rates.... The degree to which a company is affected by currency fluctuations is referred to as foreign exchange exposure....
11 Pages (2750 words) Essay

Exchange Rate Risks Evaluation

The best way of doing so is making the foreign assets and liabilities equal so as to cut down the impact of any change that might occur in the exchange rates.... It refers to how the change in exchange rates affects the competitiveness of a business on an international scale.... Currency risk can broadly be divided in to three further categories, namely transaction… Below we will discuss each of these three types of risks in detail and determine the nature of the risk faced by the importer in For instance, let's say goods are sold by a vendor in United Kingdom to a customer in United States on the first of January, and the customer has promised to make a payment in the next three months....
7 Pages (1750 words) Essay

Exchange rate and exchange: how money affects trade

Exchange rate This paper seeks to identify ways in which money affects trade based on exchange rates and exchange.... The price of foreign currency based on the US dollars is referred to as the foreign exchange rate.... Movement in a country's exchange rate occurs partly when a change develops in its people's assessment of their... They would first have to enter the foreign exchange market and buy Yen.... The decisions made by nations' central banks to change their money supply aiming at managing their national economies, control inflations, change the circulation of money as well as raising or lowering interest rates are referred to as monetary policies....
5 Pages (1250 words) Term Paper

Derivatives and Risk: Green plc

om defines FRA as an over-the-counter contract between parties that determines the rate of interest, or the currency exchange rate, to be paid or received on an obligation beginning at future start date.... "Derivatives and risk: Green plc" paper describes the main types of risk facing Green plc which has dealings in foreign currency, illustrates the three hedging strategies available to Green plc, and describes the two hedging transactions that the treasurer could employ....
6 Pages (1500 words) Assignment

Exchange Risk

The current paper highlights that the exchange rate risk is the most important among these various forms of risk.... Therefore currency is constantly exposed to exchange rate risk.... There are many different options for Antarctica for hedging its exchange rate risk.... These risks include political, default, legal, exchange rate risk etc (Eun &Resnick, 2004).... The exchange rate risk is the most important among these various forms of risk....
12 Pages (3000 words) Research Paper

Foreign Direct Investment and Forwarding Contracts

Forward contracts refer to financial contracts that lock in an exchange rate that will apply to a future transaction.... Thirdly, the currency options can be used to minimize losses that result from foreign exchange currency fluctuations.... Forward contracts, currency swaps, and currency option are major types of hedging commonly used to minimize or remove the foreign exchange risks facing a company.... First, forward contracts help to eliminate or minimize the risks and exposures caused by foreign exchange currencies changes....
12 Pages (3000 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us