Exchange Rate Mechanisms Paper - Currency Hedging
Exchange Rate Mechanisms Paper - Currency Hedging
Currency hedging involves deliberately taking on a new risk that offsets an existing one, thereby reducing a businesses' exposure to negative change in exchange rates, interest rates, or commodity pricing (Economists.com, n.d.). "Currency hedging allows a business owner to greatly reduce or eliminate the uncertainties attached to any foreign-currency transaction" (Fraser, 2001). It is impossible to predict the how much a currency will be worth on the exact day that a company will be converting it. With hedging, the uncertainly is gone. Many companies that have international operations are constantly juggling multiple transactions, with payments that are staggered and tied to the swing of a number of currencies.
There are a growing number of banks as well as business to business websites that offer currency hedging, regardless of company size. It used to be that the only way to truly avoid the risk of currency fluctuation was to transact all international business in U.S. dollars. For small companies, especially, it would be hard to insist on these terms (Economists.com, n.d.). There are a number of currency hedges, including: spot contract; forward transactions; options; currency swaps; and non-deliverable forwards (Wachovia, n.d.).
Spot contracts are a way of converting currency from another country into U.S. dollars or for making a payment in foreign currency. Currency can be bought at today's exchange rate, and in most cases, the final settlement occurs in two days. Forward transactions are very popular, especially for those just getting into currency hedging. Forward transactions allow a company to buy or sell a currenc...
... middle of paper ...
..., all international business transactions would be paid in U.S. dollars and there would be no need for currency hedging. Unfortunately, many customers and suppliers will not go along with those terms. Businesses that hope to successfully operate internationally will do well to fully educate themselves relative to the benefits that currency hedging offers.
References
Economists.com (n.d.). Economics A-Z. Retrieved October 4, 2005, from htto://www.economist.com/research/Economics/alphabetic.cfm?TERM=HEDGE
Fraser, J. A. (2001, March). Follow the big guys. Inc. Magazine, , . Retrieved October 4, 2005, from http://www.inc.com/magazine/20010301/22118.html
Hill, C. (2003). International business: Competing in the global marketplace (3rd ed.). New York: The McGraw-Hill Companies.
Wachovia (n.d.). Currency hedge tools. Retrieved October 3. 2005, from www.wachovia.com
Griffin, R. & Pustay, M. International Business, 2003, Pearson Education, Upper Saddle River. Pg. 301
The pharmaceutical industry is relatively immune from the effects of economic cycles. Demand for the industry's product remains constant in up and down economic cycles as market demand is a function of the overall health of the population. However the globalization of the pharmaceutical industry increases the risk associated with foreign investments and exchange rates. The firms in this industry seek to minimize risks by using hedging practices such as foreign currency forward-exchange contracts, borrowing in foreign markets, and using currency swaps.
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
Hill, C., Wee, C. and Udayasankar, K. 2012.International Business:An Asian Perspective. 8th ed. Singapore: McGraw-Hill.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
With the theoretical part on FX exposure serving as background, this part focuses at some more practical issues that arise in terms of assessing the exposure. In order to manage the risk, a
Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.
see, foreign exchange hedging was an area of key importance for AIFS given the level of currency
Svensson, G., 2001. 'Globalization' of Business Activities: A 'Global Strategy' Approach, Management Decision, 39(1), pp.6-18.
15. Hill, Charles W.L. International Business: Competing in the Global Marketplace. New York : McGraw-Hill, 2007.
There is one thing that differentiates the international business with the domestic business where it uses more than one currency in the commercial transaction. For example, if a company from British purchases some goods from a company from US, the international transaction will require for exchanging pounds and U.S. dollars which involve the foreign exchange market. In the foreign exchange market, any country that wish to do business with foreign country, the country need to convert their domestic currency into the foreign currency that they are wish to cooperate with through foreign exchange.
International Marketing, at its simplest level, involves the firm making one or more marketing mix decisions across national boundaries (Jobber, 2010). At its most complex level, it involves the firm establishing manufacturing facilities overseas and coordinating marketing strategies across the globe (Jobber, 2010). There are various reasons for going global, some of which are: to find opportunities beyond saturated domestic markets; to seek expansion beyond small, low growth domestic markets; to meet customers’ expectations; to respond to the competitive forces for example the desire to attack an overseas competitor; to act on cost factor for example to gain economies of scale in order to achieve a balanced growth portfolio. The methods of market entry that could be used are indirect exporting (for example, using domestic –based export agents), direct exporting (for example, foreign –based distributors), licensing, joint venture and direct investment. I found this par...
Daniels, J. D., Radebaugh, L. H., and Sullivan, D. P., (2011). International Business: Environments and Operations. Prentice Hall, Upper Saddle River, New Jersey.
Stonehouse, G., Campbell, D., Hamill, J. & Purdie, T. (2004). Global and Transnational Business (2nd ed.). Chichester: John Wiley & Sons.