Forigen Exchange

Related Essays

Dollar Vs Euro
the Euro currency has penetrated the American economy. Sadly, America is losing on the forigen exchange market, thus increasing the cost of import trade and losses
Floating Exchange Rates: The Only Viable Solution
Review 12 September 1994: 32-36. _________,"Introduction." The Merits Of Flexible Exchange Rates. Ed. Leo Melamed. Fairfax, Virginia: George Mason University Press
Long Swings In The Exchange Rate And The Excess Returns Puzzle: The Ro
foresight. The authors offer a well worked out model of how agents persistently bid the exchange rate away from the expected long-run equilibrium rate. It seems
The Securities And Exchange Commission
of 1933 ( The U.S Securities and Exchange Commission, The Laws that Govern the Securities Industry (

Submitted by to the category Business and Industry on 08/30/2010 07:20 AM

What is meant by foreign exchange risk?

Foreign exchange risk means taking the risk that tomorrow’s exchange rate will differ from today’s rate.


What specific problems does foreign exchange present in an organization?

An organization may encounter a problem with foreign exchange when they are competing with another seller for a specific item and the amount of the currency fluctuates.

For example A Chinese beauty supply distributor enters into a contract with a Indian supplier to buy hair from India for 8,800. The amount is payable on the delivery of the hair, 30 days from today. We see the range of spot rates that we believe can occur on the date the contract is consummated. On the thirtieth day, the Chinese importer will pay some amount in the range of $13,699.84 (8,800 × 1.5568) to $15,087.60 (8,800 × 1.7145) for the hair.


At the time of purchase the Chinese distributor is not certain what its future dollar outflow will be in 30 days. Therefore, the dollar value of the contract is uncertain.


The variability of the exchange rate induces variability in the future cash flow.


How may an organization that needs euros in 6 months protect itself from currency fluctuations?

An organization should contact their bank to assist with a form of hedging being that political stability or lack thereof has an impact on currency fluctuations. Typically the more stable the political situation the less likely a currency is to fluctuate. Hedging is a means of insuring against the price of an item or currency moving against you in the future.


Typically the more stable the political situation the less likely a currency is to fluctuate.

The political situation would typically inform managers on how aggressive to approach hedging strategies.

 Clearly, for the American investor, the exchange factor induces a greater variability in the dollar rate of return. Hence, the exchange rate fluctuations may increase the riskiness of the...

View Full Essay
Full Essay Stats...
  • Words: 674
  • Pages: 3
  • Views: 1024