Foreign Exchange Currency Risk
International Financial Management
Foreign Exchange Risk Analysis
Assignment submitted by:
CURRENCY EXPOSURE
A currency exposure is any business operation whose profitability can be impacted by a currency exchange rate fluctuation.
Currency exposures assume many forms: they can be assets or liabilities; current or committed; contracted or merely forecast; they can be for trade, investment or balance sheet purposes. Cases of currency exposure can emerge at any point along the value chain, with various repercussions. Each requires a transfer of funds, and for each the rate of exchange is uncertain. Examples of different types of currency exposures are presented below.
FIGURE 1: CURRENCY EXPOSURES ACROSS THE VALUE CHAIN
Project planners calculate profitability based upon competitiveness in the target market.
Thereafter, a competitor in a third country benefits from favorable exchange rates between its currency and the currency of the target market. The exchange gap makes the competitor’s product more competitive. The product loses market share and ceases to be profitable.
Product manufacture relies on components or machinery purchased in foreign-denominated currency. A shift in exchange rates renders these purchases more expensive—in terms of home-country currency—and the product loses profitability.
|Development |Manufacture |Marketing |Sale |Accounting & | |
| | | | |Reporting | |
| | | | | | |
An unfavorable exchange rate movement renders products relatively more expensive in terms of the foreign currency.
The vendor must either maintain the
Foreign Exchange Risk Analysis
Assignment submitted by:
CURRENCY EXPOSURE
A currency exposure is any business operation whose profitability can be impacted by a currency exchange rate fluctuation.
Currency exposures assume many forms: they can be assets or liabilities; current or committed; contracted or merely forecast; they can be for trade, investment or balance sheet purposes. Cases of currency exposure can emerge at any point along the value chain, with various repercussions. Each requires a transfer of funds, and for each the rate of exchange is uncertain. Examples of different types of currency exposures are presented below.
FIGURE 1: CURRENCY EXPOSURES ACROSS THE VALUE CHAIN
Project planners calculate profitability based upon competitiveness in the target market.
Thereafter, a competitor in a third country benefits from favorable exchange rates between its currency and the currency of the target market. The exchange gap makes the competitor’s product more competitive. The product loses market share and ceases to be profitable.
Product manufacture relies on components or machinery purchased in foreign-denominated currency. A shift in exchange rates renders these purchases more expensive—in terms of home-country currency—and the product loses profitability.
|Development |Manufacture |Marketing |Sale |Accounting & | |
| | | | |Reporting | |
| | | | | | |
An unfavorable exchange rate movement renders products relatively more expensive in terms of the foreign currency.
The vendor must either maintain the