Introduction - Introduction If the whole world was existed...

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Introduction If the whole world was existed under one political jurisdiction, to use single currency and there was no any trade restrictions, that “market portfolio” would be consider all securities around the world, taken in shares corresponding to their market value. Then more companies might survive in crisis and not thinking about eliminating currency risk in order not to lose huge amount of money to converting currency rate. Unfortunately, there are political boundaries, different currencies, trade restrictions and currency exchange. These factors reduce, but not completely destroy the benefits to be derived from international investment. There are disadvantages and advantages corresponding with currency risk, but the point is how to manage with currency rate, and how to eliminate risk to make profit not cost. In the modern world of globalization and international business, companies would be carry out different types of international activities which ought include exports, imports, purchasing raw materials from abroad, raising funds abroad or investing in international market, and all this activities considering one necessity to deal with many currencies, domestic exchange rate and market foreign exchange rate. This activity is one of the main impacts to Cash Flow of company. As we know Cash Flow plays operating, financing and investing roles and presents the liquidity of company. This problem statement also considers our case study with Swedish Engineering Corporation. Company activity connected with design and constriction of industrial machines tools. Last year they made contract with car Manufacturing Corporation in USA. The contract is worth 18 million USA dollars. To analysing the Income Statement we can see Sales was 460,16 million crown, Cost of Sales 322,11 million crown which can be the cost of raw materials, P&PE. Cost of sales is worth close 70% of Sale, which also in impact of currency exposure, where we can see in the diagram, that the value of Swedish Crown measured against the USD dollar. Swedish Co disappointed about expected profit. Because net profit was 4,49 million crowns, just 0,98% of all Sales, which is close to break even. But, they had another opportunity with another contract with German, which is worth 3 million Euros. My task is eliminate risk, hedge CF, consider some financial securities strategies and give recommendation to Swedish Co.
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2. Literature Review 2.1 Foreign exchange risk As defined by the online dictionary www.businessdictionary.com , foreign exchange risk means “The risk of an investment's value changing due to changes in currency exchange rates’’. Also says it occur between exporter and importer, the exporter or lender incur losses when the exchange rate decline against the currency of
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This note was uploaded on 03/09/2011 for the course FINANCE 4 taught by Professor Ghkjit during the Spring '11 term at IIT Kanpur.

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Introduction - Introduction If the whole world was existed...

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