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Pages:
7 pages/≈1925 words
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10 Sources
Style:
Harvard
Subject:
Accounting, Finance, SPSS
Type:
Essay
Language:
English (U.K.)
Document:
MS Word
Date:
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Topic:

Causes of Exchange Rate Risks and Ways to Reduce Risks using Financial Markets

Essay Instructions:

This essay needs to use calculation formulas to demonstrate opinions, and use referfence as much as possible. Referfence needs to be in the past five years.
The tutor asks to read Chapters 16-22 of International Economics 16th Edition Pugel, Thomas. And Chapter 26 of Economics 10th European Edition Michael Parkin.

This assignment is worth 50% of the module mark. The deadline time for the submission of the second assignment is 3pm on Thursday 13th January 2022. Work may be submitted on any date prior to the deadline. All assignments must be submitted electronically via the module site on Moodle. The file format has to be either MS Word or pdf. You can submit only one file. Instructions  This is an individual piece of work.  The assignment consists of one question.  Word Limit: 1800 words  Include one reference section covering all questions at the end of your assessment. The word count must be stated clearly on the cover page of your submission. If you exceed or fall short of the stipulated word limit by more than 10%, you should expect to be penalised. For this coursework, you will find below what is/is not included in the word count. Included: Quotations Excluded:  Cover page, list of contents, list of tables and figures.  List of references / bibliography (in-text Harvard style references are also excluded).  Appendices (be careful on their use)  All table row and column titles, labels on diagrams / graphs etc.  In-text table content that exhibits numerical, primary or secondary data 2 Question Explain the causes of the main short- and long-term risks faced by large firms that result from exchange rate fluctuations (assume that the firm imports a proportion of its raw materials and exports a proportion of its production). Briefly suggest how firms may manage and / or reduce these risks using financial markets. Assessment criteria Marks will be awarded according to the following main criteria:  Achievement of the objectives of the question  Accurate explanation and appropriate use of relevant economic theories, concepts, analysis and methods including a critical assessment  Logical structure of the arguments  Clarity of explanation – fluency and conciseness of written exposition, grammar and correct spelling  Demonstration of knowledge of the relevant literature and proper citation of sources.  Keeping to the word limit, inclusion of word count.

Essay Sample Content Preview:

CAUSES OF EXCHANGE RATE RISKS AND WAYS TO REDUCE RISKS USING FINANCIAL MARKETS
Student Name
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Table of Contents 1.    Introduction. 3 2.    Causes of Risks due to Exchange Rate Fluctuations. 3 2.1      Economic Risk. 3 2.2      Translation Risk. 5 2.3      Transaction Risk. 7 3.    Managing and Reducing Risks using Financial Markets. 8 3.1      Dealing with Economic Risks. 8 3.2      Dealing with Transaction Risks. 8 3.3      Dealing with Translational Risks. 10 4.    Conclusion. 11 References. 12
Word Count: 2022 words
Causes of Exchange Rate Risks and Ways to Reduce Risks using Financial Markets
Introduction
Globalization allows businesses to emphasize sales and production activities to improve sales, which, in turn, affects the profitability, net cash flows, and market values of companies. The exposure to foreign exchange risk influences the international and domestic businesses' values in the end, leading to the adaptation of powerful strategies to overcome the currency fluctuation risks (Wen & Wang 2020). Multinational businesses operate efficiently to use financial and operational hedging against foreign exchange risks, strengthen the stock returns, and emphasize forward future and options to overcome such risks (Pugel 2015). The report aims to discuss the causes of short-term and long-term risks that might arise because of exchange rate fluctuations. In the end, the ways to manage and reduce exchange rate risks using financial markets are recommended.
Causes of Risks due to Exchange Rate Fluctuations
Large businesses deal with foreign currencies and exchange rates risks and are exposed to different currency risks like economic, translation, and transactional risks (Pugel 2015). When Tesco purchases DVDs from Japan, it pays in yen. Another example is when Chinese Airline's purchase engines from Rolls-Royce, the payment is made using yen. The section emphasizes the causes of risk for a large business like Mark & Spencer, who imports some raw materials and exports some production to other countries; it pays in the form of euro to European countries for import and receives pound from other countries.
Economic Risk (Long-Term Risk)
A fluctuation causes economic risks in the cash flows and market value in the future, where the impact is seen due to unanticipated exchange rate changes and a business's competitive position. The economic risk for companies relates to the strength of imports and exports. The results are long-term, and Purchasing Poer Parity (PPP) theory is applicable here where the currencies of different companies are compared through a basket of goods approach. The theory compares two and more countries' economic productivity and living standards. If Mark & Spencer exports to Eurozone from the UK, the euro could be weakened in terms of currency, i.e., €1.1 to €1.3 (Parkin et al. 2017). It means that now more Euros are required against the Pound Sterling, making the euro less valuable. The risk might a...
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