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Financial Risk Management

In: Business and Management

Submitted By himike223
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Pages 11
Foreign Exchange Risk Management
Michael Highfill
Liberty University
BUSI 620 – B05 LUO
Dr. Mike Thirtle
July 6, 2012

Foreign Exchange Risk Management Introduction Foreign exchange (FX) is a risk factor that must be considered by all firms that wish to enter, grow, and succeed in the global marketplace. Although most U.S. exporters prefer to sell their goods in U.S. dollars, creditworthy foreign buyers are increasingly demanding to pay in their local currencies (“Foreign Exchange Risk Management”, n.d.). Therefore, this currency exchange adds risk to any global trade that must be accounted for and managed, for a firm to remain competitive in the global marketplace. Definitions Foreign Exchange Risk Before we begin our discussion, we must define a working definition of foreign exchange risk. Global commerce is facilitated through foreign exchange markets. These markets affect global commerce in two ways. First, importers exchange their domestic currency for foreign currency, in order to purchase international goods. Second, multinational companies exchange profits earned in foreign currencies for domestic currency to use in their home nation. The foreign currency exchange market is made up of corporations, governments, and private individuals who trade international currencies among themselves (Bofah, n.d.a). The exchange rates for currency pairs such as the United States (U.S.) dollar and the Euro (USD/EUR), are set by trades among market participants based on factors associated with the economic and political environment that exist in the underlining country. Thus, strong valuations are awarded to counties with growing economies and stable political situations. Investors desire the currencies of these countries in order to participate in the growth opportunities offered. This demand causes...

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