are conscious of their risk and have policies at hand to efficiently manage it. The following are mechanisms that a company can protect itself against losses incurred due to a sudden rise in the foreign exchange rate: Hedging: This is by having a company’s operations in several different countries and their assets and liabilities designed in foreign currency. The foreign exchange value of its assets and liabilities a company operates in the foreign exchange market as hedgers to protect itself against the risk of fluctuations in the foreign exchange rate (MyForexEye, 2018). In our case, the Striking Furs could be having a branch in Canada. By hedging foreign assets in the company’s portfolio, it will not lose any money if the currency in investment falls. On the other hand, the company will not gain anything if that currency appreciates it. With numerous currency
FOREIGN EXCHANGE RISK MANAGEMENT 3 fluctuating, investors need to remove as much as their currency risks as they can. Currency Forward Contract: This is a popular currency risk management mechanism, it enables organizations to secure a fixed exchange rate or payment scheduled in the future to protect themselves against currency market volatility. The payment method can be a flexible or fixed date. The ability to secure the rate helps prevent the foreign exchange risk, protect the business’s margin, and allows management to predict the cash flow more precisely (Homaifar, 2004). With a forward contract, management can better forecast their profit margins and
You've reached the end of your free preview.
Want to read all 5 pages?
- Spring '16
- Exchange Rate, Foreign exchange market