Foreign Exchange Risks Research Assignment Paper (Essay Sample)
Before starting the case, make sure to go through the required reading material carefully. Review the concepts of exchange rates, currency hedging, and other methods of dealing with exchange rate risk. The topic of this module is difficult, so make sure you go carefully through all of the required tutorials and book chapters. When you have finished reviewing the background materials, apply your knowledge of the material to answer the following questions in a four to five page paper:
Suppose you are running a very small business that exports all of its products to Europe, and 100% of your revenue comes from Euros. You have a family to support and a drop in the value of the Euro could be devastating to your personal financial situation. What methods do you think would be best to manage this risk under your circumstances? Refer to at least one of the required readings from the background materials in your answer.
Consider a large multinational consumer product company with operations in all major advanced and emerging economies. Now suppose the value of Indonesian and South African currencies drops dramatically and the value of the Chinese RMB increases dramatically. What kind of strategic changes in marketing and/or location of production facilities do you think this company should take given these new exchange rates? Explain your reasoning, and make references to Deloitte Research (2006) and Shackman (2015) in your answer.
Suppose you are a financial manager stationed in a foreign country, and your boss at headquarters in New York asks you to make a prediction about the future exchange rates in the country you are currently in. You see that the economy in the country you are in has started to grow more rapidly with a lot of new foreign investment. You also see that prices are much lower in this country than they are back in the U.S. For example, you see that the price of a Big Mac at McDonalds is half of what it costs you at home. Would you tell your boss that you expect the value of the currency in this country will increase or decrease? Explain your reasoning, and make references to Dlaby and Scott (2006) in your answer.
Answer the assignment questions directly.
Stay focused on the precise assignment questions; don't go off on tangents or devote a lot of space to summarizing background materials.
Make sure to use reliable and credible sources as your references. Articles published in established newspapers or business journals/magazines are preferred. If you find articles on the Internet, make sure they are from a credible source.
Foreign Exchange Risks
Running a business that primarily operates on export market is not easy. Considering that all my revenues come from the exportation of the products to Europe, I am susceptible to the risks in foreign currency. A fall in the value of Euros, for instance, will affect my business’ finances drastically. Due to these risks, I have enacted ways through which I can protect my personal finances. The ways are discussed below.
The first way to protect me from this risk is through is hedging my bets in an already currency-hedged mutual fund (Constance, 2014). By employing the certain investment practices that are sophisticated for instance options and futures in the hedging of currency risks, hedged mutual funds minimize losses a great deal. By hedging my bets in Euros, I will neither be liable for losses nor will I be for gains, but at least I will be safe (Rachel, 2014).
Productivity increment is another vital method I have put into an account. According to Vikram Mahidhar, in offshore operations, through such programs that improve operations, production will be increased. The result is that it offsets the rising costs. Some of these practices that I can employ are lean production. This increases productivity at low costs of labor, decrease the delivery lead time and improve quality among others.
I can also protect my personal finances in my small business by shorting the overvalued currency (Bryan, 2014). Now that I am operating my business with the U.S dollar but get my revenues in Euros, I can exchange the Euros to US dollars. In the case or the time when Euro will appreciate, I then buy it at a lower exchange rate. My profit will come from the difference between the buying and the selling prices.
Investing in the local procurement and production is another vital method to reduce risks in the currency fluctuation era. I will also look for ways of establishing supply chains in the local markets in the United States. By doing this, I will secure my business the costs of inputs. During fluctuations like for my case, the depreciation of Euros, I will still stabilize my revenues and thus reducing the risk. The devastations of financial situations as a result of fluctuations in the foreign currency can be better dealt with by applying simple strategies explained above.
Fluctuations in exchange rates of foreign currency will affect companies with multi-national business operations. This, therefore, calls for adjustments to avoid losses and keep up with the competitive global market. The adjustments here for many companies involve the employment of what is called operational hedging strategy (Joshua, 2015). In the case of a multinational consumer product company which is operating in various leading economies, fluctuation of exchange rates in these economies will directly affect it. For this matter, the company faces reduced value in currency in South Africa and Indonesia but an increase in the Chinese RMB. The company has to make strategic adjustments to avoid loss now that it is operating in both companies.
Changes in the locations of production and marketing are inevitable for the company to sustain itself in the market. The company should increase its market supply in China and reduce its market supply in South Africa and Indonesia. It should also increase import market from South Africa and Indonesia and reduce it in China. This is bec...
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