Explain how exchange rate exposure may create risks
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One senior officer believes the best way to manage exchange rate exposure is to do nothing. She believes that currencies are unpredictable. She believes trying to manage currency risk is useless and a waste of money because of this unpredictability. She writes you an e-mail stating her position and asked you for your thoughts.
Compose an e-mail responding to the senior officer.
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One senior officer believes the best way to manage exchange rate exposure is to do nothing. She believes that currencies are unpredictable. She believes trying to manage currency risk is useless and a waste of money because of this unpredictability. She writes you an e-mail stating her position and asked you for your thoughts.
Compose an e-mail responding to the senior officer.
Dear ...,
I can see the merits in your point of view but let us have a careful look into the currency markets.
A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).
Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment ...
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