Currency Exchange Risk Management.edited

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Running head: CURRENCY EXCHANGE RISK MANAGEMENT 1

Currency Exchange Risk Management

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CURRENCY EXCHANGE RISK MANAGEMENT 2

Introduction

Multinational corporations operate in a highly dynamic business and economic

environment. Economic and financial variable are volatile because they are subject to changes in

the external business environment. The dynamic nature of global trade gives room for the

emergence of financial and operational risks. Financial risks in international business are very

high and have devastating effects. International companies have to prepare in advance on how to

mitigate these risks when they emerge. Otherwise, they risk collapsing. Examples of financial

risks experienced in international finance include; currency exchange, financial market stability

and foreign taxes and regulation risks.

Currency exchange risk

Currency exchange risk is the danger associated with converting a currency to another

unit. A good example is when converting Euros to dollars. International corporations have to

convert their currency into the unit accepted locally so that they have to transact. This type of

risk is also known as conversion exposure. Multinational corporations are adversely affected by

changes in exchange rates. For instance, these companies have to implement contracts in home

currency equivalents. The fluctuation in the exchange rate could affect loans taken in their

country of origin. The cost of advancing loans could fluctuate according to changes in exchange

rate. Hence, they may end up paying more loans borrowed (International Monetary Fund, 2008).

Financial market stability risk

Global businesses fundraise through financial markets. The stability of financial markets

makes it easy for these firms to borrow capital from financial institutions. On the other hand,

instability in these markets makes it hard for them to access funds. In 2009, the world witnessed

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Running head: CURRENCY EXCHANGE RISK MANAGEMENT Currency Exchange Risk Management Name: Instructor: Course: Date: 1 CURRENCY EXCHANGE RISK MANAGEMENT 2 Introduction Multinational corporations operate in a highly dynamic business and economic environment. Economic and financial variable are volatile because they are subject to changes in the external business environment. The dynamic nature of global trade gives room for the emergence of financial and operational risks. Financial risks in international business are very high and have devastating effects. International companies have to prepare in advance on how to mitigate these risks when they emerge. Otherwise, they risk collapsing. Examples of financial risks experienced in international finance include; currency exchange, financial market stability and foreign taxes and regulation risks. Currency exchange risk Currency exchange risk is the danger associated with converting a currency to another unit. A good example is when converting Euros to dollars. International corporations have to convert their currency into the unit accepted locally so that they have to transact. This type of risk is also known as conversion exposure ...
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