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International Finance - Essay Example

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Retail and wholesale investors put their money in various financial instruments to grow their wealth. With any investment decision, there is risk associated with it. This is the price the investors pay for their investments, if…
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Download file to see previous pages Though the negative event cannot be avoided, but the impact can be reduced. There are two types of risks vis-a-vis systematic and unsystematic risk. Investors usually hedge against systematic risk which includes financial risk, operational risk, liquidity risk, financing risk, currency risk, etc.
According to the authors Clark and Ghosh, large firms usually balance their hedging techniques so as to minimise the cost of hedging. Corporate managers try to identify the risks facing the company so that they can strategise a suitable hedging technique to counter the effect of those risks. Big corporations are quite concerned with the foreign exchange risk, owing to their global business exposure. The author also stated that, the large corporations have global presence and trade across nations, thus vulnerable to currency risk as they have to trade in the local currency (Clark and Ghosh, 2004). Though there are various hedging techniques like futures, forwards, options, swaps and debt, but big corporations usually trade in futures, forwards, options and debt (Homaifar, 2004).
As per the author Coyle, companies enter into an agreement with other party willing to buy/ sell currency. It is in the form of an agreement, where one party agrees to buy/ sell a specified amount of the currency at an agreed price, at an agreed time, delivery method to another party. Forwards trade takes place in two ways i.e. the spot market where the delivery takes place after T+2 days and the forward market where the price and other conditions are set before the delivery. The delivery takes place at a future date. In forwards contract companies usually face the counterparty risk, where one of the party refuses to buy/sell the derivative, thus putting the hedger at risk (Coyle, 2000).
X is an IT company that exports software services to Y, a company in the US. X expects a payment of $1 million after five months. Assuming the exchange rate is £1/$, it will receive £1 million at the ...Download file to see next pagesRead More
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