What are some strategies and techniques available to Fresh Juices, Inc. to manage foreign exchange risks?
As a senior financial analyst for Fresh Juices, Inc., the largest fresh fruit drink company in the United States, you are a key player in corporate finance for the business. You are consulted on major capital projects, prepare analysis for executive officers, present material at senior management meetings, and play the overall role of advisor to executive and senior officers.
Fresh Juices, Inc. has witnessed its sales grow from US$1 million in the first year of operations in 1970 to US$1.5 billion last year. The company started as a regional supplier of fresh fruit drinks in California and initially expanded in the West. However, over the last 15 years, the company has moved further east, north, and south. Today, the company's lines of products can be found on the shelves of any major grocery store in the U.S., and its market share of fresh fruit drinks is 80% in the United States.
Multinational firms must constantly assess the business environments of the countries they are already operating in as well as the ones they are considering investing in. One of the most important international risks, which an organization faces, is exchange rate risk.
Exchange Rate Risk
Organization which invest internationally in today's increasingly global investment arena face the prospect of uncertainty in the returns after they convert the foreign gains back to their own currency. Unlike the past when most U.S. investors ignored international investing alternatives, investors today must recognize and understand exchange rate risk, which can be defined as the variability in returns on securities caused by currency fluctuations.
Exchange rate risk is sometimes called currency risk.
Translation exposure is simply the difference between exposed assets and exposed liabilities. The controversies among accountants' center on which assets and liabilities are exposed and on when accounting-derived foreign exchange gains and losses should be recognized (reported on the income statement). A crucial point to realize in putting these controversies in perspective is that such gains or losses are of an accounting nature? That is, no cash flows are necessarily involved.
Firms have three available methods for managing their translation exposure: (1) adjusting fund flows, (2) entering into forward contracts, and (3) exposure ...
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