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Exchange Rate Risk - Assignment Example

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The exchange rate risk affects international firms in three major ways namely transaction exposure, translation exposure, and…
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Exchange Rate Risk
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"Exchange Rate Risk"

Download file to see previous pages Economic exposure involves potential negative effect on business future cash flows from foreign subsidiaries due to fluctuation of exchange rate (Madura, 2012).
The various hedging strategies that GBATT can employ to cushion exchange rate risk entails futures contract, forward contract, and options contract (Madura, 2012). GBATT can employ the futures contract to avoid exchange rate risk by entering into a contract with a financial institution on the price and quantity of foreign currencies that will be applied at a specific date. Similarly, the forward contract can be applied by specifying the price at which the foreign currency will be exchanged at with a financial institution in a contract. The options strategy on the other hand will involve entering into an agreement that will give GBATT to sell the foreign denominated currencies but not an obligation at a given rate to domestic currency at specific date. Consequently, the three hedging strategies will enable GBATT to avoid exchange rate volatility.
One of the firms that employ hedging strategies to cushion exchange rate risk is Coca Cola Company to reduce translation exposure from its foreign subsidiaries (Coca-Cola.com, 2012). In addition, Dell Corporation has adopted hedging strategies to cushion exchange rate fluctuation (Dell, ...Download file to see next pagesRead More
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