Explore BrainMass

Foreign exchange risk

What is meant by foreign exchange risk? Research a company in the news (or your own organization) and explain how its operations involve foreign exchange risk. What specific problems does this present and how is the company trying to address those issues? What other techniques are available to protect companies from currency fluctuations? Put this type of risk in perspective and compare it to other risks the company you've chosen or businesses in general face.

Solution Preview

My organization exports clothing to numerous countries across the world. This operation involves foreign exchange risk because my company receives payment in various currencies such as Euro, British Pound, etc., whose exchange rate with US dollars is subject to constant fluctuation. Since there is a significant time gap between the period goods are delivered and payment is finally received, we are unsure of the exchange rate prevailing at the time of receipt of payment. Therefore, any adverse movement in exchange rates can negatively affect our revenues and profitability. For example, if US dollar gets strengthened against the Euro during the time we shipped goods and the final receipt of payment, we will be receiving less dollars per Euro as compared to original expectation. Similarly, if US dollar weakens against the Euro, we will benefit because for each Euro, we will receive more US dollars than originally expected.

This constant fluctuation in exchange rates between the currencies of two countries poses huge risks to exporters whose transactions involve multiple currencies. To address this issue, there are wide range of ...

Solution Summary

My organization exports clothing to numerous countries across the world.