StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

Exchange Rate Risk - Assignment Example

Cite this document
Summary
In this world of modern technology and globalization, international trade and business is a skill that any successful company must learn to master. Though attempts to universalize currency have successfully created the Euro in most of Europe, international and fluctuating exchange rates as well as international banking has had an enormous impact on modern business…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93.5% of users find it useful
Exchange Rate Risk
Read Text Preview

Extract of sample "Exchange Rate Risk"

Download file to see previous pages

The term exchange rate risk is used to define the possibility that, because of fluctuation currency values, companies dealing in more than one currency may end up with more or less of a profit. In the Bruce Company's case, a fluctuation of 1.45733 Euros per Sterling denotes a negative exchange rate risk. Put more simply, the Bruce Company must pay the French company a total sum of 4.48 million Euros in four equal installments of 1.12 million Euros. Because the Sterling is currently stronger than the Euro, Bruce Company will loose money during four separate transactions in which their stronger currency is converted to the weaker currency.

Thus, Bruce Company must determine a way to hedge against the exchange rate risk, or take out another investment specifically to reduce or eliminate this risk. One way to hedge against this risk is allowing the sterling to accrue interest in a money market account. Because interest in a British account is and will continue to be greater than that of a French account, a simple rate of return calculation will show that the British account will yield higher profit For instance, consider one payment of 1.

12 million Euros kept in a British Money Market account for three months. 1.12 Million________ = 768, 5291.45733ROR= 768, 529 ( .25 + 4.59375 ) ROR= 3,722,562.34375If, on the other hand, the Euros were kept in a French Money Market account for three months, the following results would occur:ROR= 1.12 million (.25 + 2.75000) ROR= 3,360,000It is obvious, therefore, that using British Money Market transactions is especially advantageous in this type of scenario. The extra money accumulated in the account may compensate for, or at least soften, the blow of exchange rate risk, depending on the floating rates at the time.

There is a significant risk involved in long term Money Market account investment, however, in that they too are subject to fluctuating exchange rates. If exchange rates vary drastically in while interest is accruing, lower interest rates might, in the he end, have generated more capital once the money is exchanged for the original currency. 1Interest Rate Risk When the Bruce Company took out its loan, its choice of a fixed interest rate was an attempt to avoid great interest rate risk, as interest rates were rising.

Now that the financial advisor and others believe that the interest rate is falling, howerver, and interest rate swap is beginning to look beneficial. A company uses an interest rate swap when it exchanges its interest rate for that of another party. By swapping interest rates, companies allow themselves some freedom from climbing interest rates. In order to determine whether or not an interest rate swap is beneficial, however, the zero-coupon bonds calculations must be performed.If interest is compounded annually, using the rate of returns formula, interest rates for zero-coupon bonds are as followes:One Year Two Years Three Years Four Years 4.

675= (1+ i) 4.

...Download file to see next pages Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Exchange Rate Risk Assignment Example | Topics and Well Written Essays - 1250 words”, n.d.)
Exchange Rate Risk Assignment Example | Topics and Well Written Essays - 1250 words. Retrieved from https://studentshare.org/business/1521700-exchange-rate-risk
(Exchange Rate Risk Assignment Example | Topics and Well Written Essays - 1250 Words)
Exchange Rate Risk Assignment Example | Topics and Well Written Essays - 1250 Words. https://studentshare.org/business/1521700-exchange-rate-risk.
“Exchange Rate Risk Assignment Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.org/business/1521700-exchange-rate-risk.
  • Cited: 0 times

CHECK THESE SAMPLES OF Exchange Rate Risk

Globalization of World Financial Markets

In the paper “Globalization of world financial markets” the author analyzes benefits and detrimental consequences οf financial liberalizations.... The main issue οf the debate is that there are significant positive effects οf international capital surges into developing economies....
9 Pages (2250 words) Essay

Starbucks and Foreign Exchange Rate Risk

14 December 2008 Starbucks and Foreign Exchange Rate Risk Starbucks Corporation is a specialty coffee retailer famous globally because of its unique business model anchored in the provision of a third place for customers aside from home and workplace.... Since prices are denominated in Philippine pesos, the end of year revenues is converted into US dollar at the prevailing exchange rate which has important implications for the company.... Thus, the exchange rate appreciated to Php45/US$1 (BSP 2008)....
1 Pages (250 words) Essay

Foreign Exchange-Rate Risk Management

The case study "Foreign Exchange-rate risk Management" states that the need for foreign exchange has arisen from the requirements of companies and individuals for foreign currencies when they transact business abroad.... This paper will explore the different ways by which business entities can deal with the exchange rate variations to protect the value of their assets and profits against unpredictable risks.... When an individual converts one currency into another in an actual exchange, the risk inherent in this activity is called a transaction exposure....
8 Pages (2000 words) Case Study

Managing Exchange Rate Risk (SLP)

om/convert/fxhistory  Nobile, J (2010) “Why Hedge Foreign Currency Risk” BNET Editorial Assessing Exchange Rate Risk, (2007).... Any Business operating in a foreign country with a fluctuating exchange rate is exposed to foreign exchange risk.... 963 per $1 There is a mixed trend of exchange rate, initially a decreasing trend from Nov30, 2011 to Dec2, 2011 then an increasing trend but still not close to what it was in the beginning of the week....
2 Pages (500 words) Essay

Foreign Exchange Rates and Exchange Rate Risk

An exchange rate is the rate at which one currency is actually converted into another currency.... the rate at which the dealer will buy the currency and the rate at which he will sell the currency to the organization.... International transactions therefore are not incurred in the local currency of the organization and hence firm has to rely on foreign… It is however, important to note that the rates at which a foreign currency will be exchanged with local currency is mostly determined by the external forces, organizations therefore may have to incur losses too due to fluctuations in the foreign exchange rates....
4 Pages (1000 words) Essay

Impact of Globalization of World Financial Markets

This paper "Impact of Globalization of World Financial Markets" discusses whether financial liberalization is good or bad we need to analyze arguments given by both opponents and proponents οf financial liberalization.... First, we will consider arguments against financial liberalization....
8 Pages (2000 words) Essay

Foreign Exchange Rate Risk

"Foreign Exchange Rate Risk" paper examines the importance of effective foreign exchange-rate risk management, methods, and techniques available to manage foreign Exchange Rate Risk, corporate examples of foreign Exchange Rate Risk management, and strategy for a fast-growing company.... Before understanding the importance of foreign Exchange Rate Risk, one should understand the factors that influence foreign exchange rates.... nbsp; The term foreign rate risk refers to the risk which arises due to change in the currency....
9 Pages (2250 words) Coursework

Exchange Risk

The current paper highlights that the Exchange Rate Risk is the most important among these various forms of risk.... Therefore currency is constantly exposed to Exchange Rate Risk.... There are many different options for Antarctica for hedging its Exchange Rate Risk.... These risks include political, default, legal, Exchange Rate Risk etc (Eun &Resnick, 2004).... The Exchange Rate Risk is the most important among these various forms of risk....
12 Pages (3000 words) Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us