...The Risk that are Involved in Foreign Exchange Market FIN-571 January 14, 2017 Kevin Suber The Risk that are Involved in Foreign Exchange Market In a foreign market trade investors can purchase stock in the international market exchange. Investors buy into the foreign exchange market, because it makes the investor make valuable profits quicker in a good economy. For most investors this would seem to be too good of a deal to pass up however, there can be some risk involved investing in a foreign market. In this paper I will be discussing the types of risk involved in the market. Here are a few type of risk an investor could potential be hit with in a foreign exchange market. The foreign exchange risk include, exchange rate risk, interest rate risk, and country and liquidity risk just to name a few of the major risk. For investors it is important to understand the risks in the foreign market trade. The big risk like exchange rate risk can be damaging to an investor portfolio because it is based on the market perception. The exchange rate risk also factors a largely unregulated Forex off-exchange trading. Another risk involved in the foreign market is the interest rate risk. The interest rate risk by fluctuating in the forward speeds and forward mismatch of in maturity gaps in the transaction of the foreign exchange. To include with the following risk would be the country and liquidity risk in the foreign market. The investor does risk the potential of a country or liquidity...
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...Introduction The term “foreign exchange” basically refers to buying the currency of one country while selling the currency of another country. All nations have their own, different kinds of money (currency). This has existed throughout the ages, probably since the time of the Babylonians. As trading developed between nations, the need to convert one kind of money to another also developed. This is how a formal system of foreign exchange arose. As trade between nations developed, Britain, as the nation with the largest and strongest navy, could spread its commercial interests far and wide. It therefore became the most active trading nation, with a vast empire of colonies. As a result, Britain’s currency, the pound sterling, became a benchmark to which other currencies were compared (and exchanged) for most of the seventeenth, eighteenth and nineteenth centuries. Today, most currencies are compared to the U.S. Dollar, currently the most active and commercially strong trading nation; many currencies are still “pegged” to the U.S. Dollar for their exchange rate. Because FX risks can be identified, they can be managed. Foreign exchange management requires that governments, companies, and individuals understand the factors that influence the valuation of currency. By identifying these factors, they can enter into transactions that mitigate the risks to acceptable levels. These transactions, or hedge positions, are designed to maximize the economic benefit of foreign exchange receipts, and...
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...17. If the spot rate of the Malaysian ringgit is $.30 and the six month forward rate of the ringgit is $.32, what is the forward premium or discount on an annual basis? A. premium; about 14.5% B. discount; about 14.5% * C. premium; about 13.3% D. discount; about 13.3% E. premium; about 16.7% Solution: use Equation (5-4) [(.32 - .30)/.30] x (360/180) = 13.3% 18. If the spot rate of the Israel shekel is $.32 and the six month forward rate is $.30, what is the forward premium or discount on an annual basis? A. discount; 11.5% B. premium; 11.5% C. premium; 12.5% * D. discount; 12.5% E. premium; 22.5% Solution: use Equation (5-4) [(.30 - .32)/.32] x (360/180) = -12.5% 19. If the Canadian dollar is equal to $.86 and the Brazilian real is equal to $.28, what is the value of the Brazilian real in terms of Canadian dollars? * A. about .3256 reals B. about .3568 reals C. about 1.2 reals D. about 1.5 reals E. about .5600 reals Solution: cross rate .28/.86 = .3256 20. If the Japanese yen was worth $.0035 six months ago and is worth $.0045 today, how much has the yen appreciated or depreciated? * A. appreciated; about 29% B. appreciated; about 25% C. depreciated; about 20% D. depreciated; about 18% E. appreciated; about 15% Solution: use Equation (5-1) (.0045 - .0035)/.0035 = 29% 21. Assume: (1) the US annual interest...
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...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)...
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...Economics 2 (2006) 129-146 EXCHANGE RATE RISK MEASUREMENT AND MANAGEMENT: ISSUES AND APPROACHES FOR FIRMS MICHAEL G. PAPAIOANNOU, Ph.D. International Monetary Fund Abstract Measuring and managing exchange rate risk exposure is important for reducing a firm’s vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms, namely transaction, translation and economic risks, presents the VaR approach as the currently predominant method of measuring a firm’s exchange rate risk exposure, and examines the main advantages and disadvantages of various exchange rate risk management strategies, including tactical vs. strategical and passive vs. active hedging. In addition, it outlines a set of widely-accepted best practices in managing currency risk and presents some of the main hedging instruments in the OTC and exchange-traded markets. The paper also provides some data on the use of financial derivatives instruments, and hedging practices by US firms. JEL Classification: F31, G13, G15, G32, M21 Keywords: Financial Risk, Financial Management, Foreign Exchange Hedging, Corporate Hedging Practices Corresponding address: 700 19th Street, N.W. Washington, DC 20431 e-mail: mpapaioannou@imf.org This paper draws heavily on various presentations on risk management while the author was the Director of Foreign Exchange Service of the WEFA Group...
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...Journal, vol. V, no. 2, 2008, pp. 81-91 FOREIGN EXCHANGE RISK MANAGEMENT PRACTICES - A STUDY IN INDIAN SCENARIO Sathya Swaroop Debasish Department of Business Management Fakir Mohan University Vyasa Vihar, Balasore - 756019 Orissa, INDIA ABSTRACT Indian economy in the post-liberalisation era has witnessed increasing awareness of the need for introduction of various risk management products to enable hedging against market risk in a cost effective way. This industry-wide, cross-sectional study concentrates on recent foreign exchange risk management practices and derivatives product usage by large non-banking Indian-based firms. The study is exploratory in nature and aims at an understanding the risk appetite and FERM (Foreign Exchange Risk Management) practices of Indian corporate enterprises. This study focusses on the activity of end-users of financial derivatives and is confined to 501 non-banking corporate enterprises. A combination of simple random and judgement sampling was used for selecting the corporate enterprises and the major statistical tools used were Correlation and Factor analysis. The study finds wide usage of derivative products for risk management and the prime reason of hedging is reduction in volatility of cash flows. VAR (Value-at-Risk) technique was found to be the preferred method of risk evaluation by maximum number of Indian corporate. Further, in terms of the external techniques for risk hedging, the preference is mostly in favour...
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...Affiliation] Multinational Finance Assignment Introduction This paper is based on the foreign exchange theories and the strategies used to minimize the risk of foreign exchange. The scenario is about the two multinational airlines. One is United States Airline and the other is Lufthansa (German) airlines. Both of them are exposed to foreign exchange risks as their transactions is in different currencies. In the scenario, U.S airlines has order from France the Airbus so, they have to pay France in Euro currency. However, United States airlines report their financials in Dollars. So, any slight change in Euro will impact the profits of United States Airlines. On the other hand, we have the case of Lufthansa Airlines which is purchasing a Boeing from USA and their reporting currency is Euro. So, both of the airlines are exposed to risks in the scenarios. This paper will address the foreign exchange theories involved in the case and strategies that will help these two airlines minimize their risk of currency fluctuations. The paper will also show calculations and the instruments used to minimize foreign exchange risks and calculating profits. Analysis of Foreign Exchange market theories in the scenario Foreign exchange market is the one which involves foreign currencies like euro, pounds or yen and it the one that is traded from local currency for e.g. the dollar. The network of foreign exchange is a decentralized one and is not in a centralized location. It is nevertheless integrated...
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...Solutions for exchange rate policy of transition economy of Vietnam Dissertation zur Erlangung des Grades Doktor der Wirtschaftswissenschaft (Doctor rerum politicarum, Dr. rer. pol.) der Juristischen und Wirtschaftswissenschaftlichen Fakultät der Martin-Luther-Universität Halle-Wittenberg vorgelegt von M.A. Mai Thu Hien geb. am 23. August 1976 in Hanoi, Vietnam Gutachter: 1. Prof. Dr. Dr. h.c. Rüdiger Pohl, Martin-Luther-Universität Halle-Wittenberg 2. Prof. Dr. Martin Klein, Martin-Luther-Universität Halle-Wittenberg Datum der Einreichung: 07.06.2007 Datum der Verteidigung: 12.07.2007 Halle (Saale), Juli 2007 urn:nbn:de:gbv:3-000012127 [http://nbn-resolving.de/urn/resolver.pl?urn=nbn%3Ade%3Agbv%3A3-000012127] 2 Acknowledgements This doctoral dissertation could not be completed if I have not received the help and encouragement from numerous people. Firstly, I am greatly indebted to my first supervisor, Prof. Dr. Dr. h.c. Rüdiger Pohl, who kept an eye on the progress of my work and was always available when I needed his advices. His great advices, supports, criticisms, comments, and encouragement helped me to develop necessary knowledge to understand and to build theoretical context in this dissertation. I also would like to express my deep gratitude to Prof. Dr. Martin Klein, my second supervisor, for his suggestions and concerns with my dissertation. I gratefully acknowledge the financial support of DAAD, without which this dissertation would not have been...
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...Prof. Dr. Streitferdt International Financial Management Winter semester 2015/16 1. Prologue 1. Prologue 2. Foreign exchange markets 3. Foreign exchange exposure management 4. Financial management of multinational corporations 5. Financial management of multinational corporations 6. Corporate Governance 7. Mergers & Acquisitions 8. Risikomanagement Prof. Dr. Streitferdt: International Financial Management 1 1. Prologue Discounting Calculating present value 0 t=1 t=2 t=3 2,000 t=0 4,500 3,000 t=4 t=5 3,500 6,000 How much would you be willing to pay for this stream of future cash flows, if the interest is at i = 5.65%? Why is the result today’s value of the future cash flows? What are the assumptions of this calculation? Prof. Dr. Streitferdt: International Financial Management 2 1. Prologue Discounting Calculating present value 10/28 10/14 6,000 0 How much would you be willing to pay for this stream of future cash flows, if the two week Euribor is at i = 5.65%? What makes this calculation different from the last slide’s calculation? How many days has a year? Prof. Dr. Streitferdt: International Financial Management 3 1. Prologue Discounting Interests for investments with less than one year maturity Interests are always quoted for one year: A company has in 2012 an overdraft credit of 100,000 €...
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... When undertaking to implement major financial decisions like investing in foreign stock exchange markets. It is important for organizations to conduct due diligence of this decision. This decision might mean the generation of substantial profits, especially where a corporation gets enlisted in a stock exchange market of a foreign country. Huge profits are realized when the company invites the members of the public to subscribe its stake through (IPO) initial public offer. On the other hand, a company might accrue massive losses perhaps due to shares volatility (Maskell & Baggaley, 2003). It is of the essence that a Company evaluates the proposed investment decision of getting enlisted in foreign countries stock exchange market they choose to invest. Due diligence will enable the Company access all information relating to the movement of stock and share prices. This information will allow a company to avoid investing in equity markets that are highly volatile (Maskell & Baggaley, 2003. (Maskell & Baggaley, 2003), defines foreign-exchange risk fluctuations in the prices or value of an investment due to changes in foreign exchange rates or exchange rates. This risk is also known as exchange rate risk or merely currency risk; it is simply the loss an investor accrues during a long or a short position due to unfavourable movements in the exchange rates. Currency risk mostly affects international businesses that are more into imports and exports. The Case...
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...the Foreign Exchange Market as well as the Net International Reserves, their stabilizing methods and strategies, along with a discussion on the analysis and effects of the measures taken to attain success within the Jamaican economy. The foreign exchange market is defined as (main function) a market used for converting from one country’s currency to another using an exchange rate which determines the value of one country’s currency against another. The Jamaican foreign exchange market came to full liberalization in the 1990’s. Since then there has been much discussion on the efficiency of the market and the appropriateness of the foreign exchange rate. “The use of market microstructure models has become very popular in financial market research stemming from the inability of traditional macroeconomic models to adequately capture the short-term dynamics of financial markets” (Frankel and Froot, 1990).There have been concerns as to whether the foreign exchange rate correctly reflects the forces of supply and demand in the market. The role of the Bank of Jamaica when it pertains to foreign exchange market is market intervention, market surveillance and data collection and information dissemination; with particular attention paid to intervention. The secondary function of the foreign exchange market is to provide insurance against foreign exchange risk. Foreign exchange risk can be defined as any adverse consequence or unpredictable change that may occur to the exchange rate...
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...TFIN752 - FINANCIAL RISK MANAGEMENT ASPEN TECHNOLOGY, INC.: CURRENCY HEDGING REVIEW MME 32 – GROUP 2: INTRODUCTION AspenTech was founded by Lawrence Evans an MIT Professor. AspenTech operation started in 1982 and specialized in the development of simulation software for customers in process manufacturing industries, particularly the chemical industry. Over the next 13 years, AspenTech’s sales grew rapidly as it became a major player in the process simulation segment of the software industry. In October 1994, the firm started to go public in a $31 million initial public offering (IPO), and as of the fall of 1995, AspenTech was the only one of the firms that specialized in simulation programs for the chemical, petroleum, and petrochemical industries that was publicly traded. AspenTech offered software for both steady-state analysis and dynamic analysis. By 1995, its products were Aspen Plus, Speed Up, Max, Advent, Properties Plus, and CIM/21. Aspentech also offers worldwide support i.e. training, technical support and workshops Behind the success of its products, research and development became a crucial weapon for AspenTech. Aspen spent in R&D US$ 4.4 mio in 1992, US$ 6.6 mio in 1993 and US$ 6.9 mio in 1994, primarily on salaries of programmers and engineers In 1995 with acquisition of ISI, R&D grew to US$ 11.4 Mio which US$ 9.3 Mio for non ISI research and US$ 2.1 for ISI research. The firm’s...
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...with respect to foreign operations. B. At the other extreme it encompasses the study of the various functional areas of accounting in all countries of the world, as well as the activities of a number of supranational organizations. C. This book provides an overview of the broadly defined area of international accounting, with a focus on the accounting issues encountered by multinational companies engaged in international trade and invested in foreign operations. II. There are several accounting issues encountered by companies involved in international trade. A. One issue is the accounting for foreign currency-denominated export sales and import purchases. An important issue is how to account for changes in the value of the foreign currency-denominated account receivable (payable) that occur as exchange rates fluctuate. B. A related issue is the accounting for derivative financial instruments, such as forward contracts and foreign currency options, used to hedge the foreign exchange risk associated with foreign currency transactions. III. There is an even greater number of accounting issues encountered by companies that have made a direct investment in a foreign operation. These issues primarily result from the fact that GAAP, tax laws, and other regulations differ across countries. A. Figuring out how to make sense of the financial statements of a foreign acquisition target prepared in accordance with an unfamiliar GAAP when making a foreign direct investment...
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...Chapter 5 Exchange Rate Systems questions 1. How can you quantify currency risk in a floating exchange rate system? Answer: To characterize the risk of a currency position, you must try to characterize the conditional distribution of the future exchange rate changes. With floating exchange rates, historical information provides useful information about this distribution. For example, you can use data to measure the average historical dispersion (standard deviation or volatility) of the distribution. The higher this volatility, the riskier are positions in this currency. It is also possible to rely on more forward-looking information using the options markets (see Chapter 20). Finally, we should point out that volatility is an adequate indicator of risk when exchange rate changes are approximately normally distributed. In reality, the distribution of exchange rate changes displays fat tails, even in floating exchange rate systems, and this increases the risk of currency positions. 2. Why might it be hard to quantify currency risk in a target zone system or a pegged exchange rate system? Answer: If the peg or target zone holds for a long time, historical volatility appears to be zero or very limited, but this may not accurately reflect underlying tensions that may ultimately result in a devaluation or revaluation of the currency. Hence, the true currency risk does not show up in day-to-day fluctuations of the exchange rate. It is hard to quantify this...
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...seekers, Production efficiency seekers, Knowledge seekers, Political safety seekers Globalization process -Stage I: early domestic phase growing into the international trade phase, Stage II: A successful firm will continue to grow from simple international trade to the multinational phase characterized by production and investment both at home and abroad Twin agency: Chapter 2 Corporate Ownership, Goals, and Governance Who Owns the Business The Goal of Management two models: 1.shareholder wealth maximization(max return&min risk): market efficient&risk exsit, unsystematic risk can be diversified, systematic risk can be eliminated. Replace, take-over, vote/share 2.stakeholder capitalism model(labor union, government interfere, max income): not assume efficient or not, total risk-operating&financial risk count, long-term loyal shareholders Operation goals for MNE(incompatible): maximization of consolidated after-tax income; minimization of the firm’s effective global tax burden; correct positioning of the firm’s income, cash flows, and available funds as to country and currency...
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