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Introduction Currency exchange rate is one of the important factor which affect internal and external balances of a country. Devaluation of a local currency makes its goods relatively cheaper. So its capacity of exports is likely to increase with devaluation of local currency. With the increase in demand for local country’s goods and services, its local currency appreciates and reverse is the case if its volume of exports falls. So foreign exchange risk is described by (Christine, 1985) that this is the change in the value of the firm occur due to the potential changes in currency exchange rate. When a developing country like Pakistan is dependent on imports even to meet its demand for machinery, their parts and other goods for its local industries, then the devaluation becomes a curse. Siddiqui (2009) describes that Pakistan where economic, political and financial institutions are yet to be strengthened and administrative structure is needed to be disciplined, Pakistan is experiencing the most terrible politico-economic crises in its history. This worst situation of crisis is adversely affecting its local currency in addition to other real and monetary variables. Pakistan’s exchange rate which changes more frequently than the tradable goods and services with trade related low frequency variables such as exports and imports. The economy of Pakistan is experiencing slowdown in inflows as compare to outflows of foreign currency exchange. The foreign exchange risk appears when, on the payment day, the domestic currency has a buying power low to meet the contract. Companies adopt the derivative strategies such as future, forward contracts and swaps to prevent themselves from foreign exchange risk. In the expansion of business act... ... middle of paper ... ..., and Unni, S. (2005). ‘‘Exchange rate exposure among European firms: evidence from France, Germany and the UK’’. Accounting and Finance. Vol. 45, pp. 479-97. Salifu, Z., Osei, K. A., and Adjasi, C.K.D. (2007). “Foreign exchange risk exposure of listed companies in Ghana”. The Journal of Risk Finance. Vol. 8, No. 4, pp. 380 393 Siddiqui A. M. (2009). “Modelling Pak Rupee Volatility against Five Major Currencies in the Perspective of Different ExchangeRate Regimes”. European Journal of Economics, Finance and Administrative Sciences. Vol. 17, pp. 1-16. Williamson, R. (2001). ‘‘Exchange rate exposure and competition: evidence from the automotive industry’’. Journal of Financial Economics, Vol. 59, pp. 441-75. Wilson, A., and Heitger, D. (2002). “accounting for hedges: foreign currency exposure”. Finanacial instruments special. Vol. 10, No. 1, pp. 33-37


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