Hedging Strategy and Foreign Exchange Risks
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1. What is the basic translation hedging strategy? How does it work?
2. MNCs can always reduce the foreign exchange risk faced by their foreign affiliates by borrowing in the local currency. True or false? Why?
3. Explain why FASB 133 is 'one of the most complex FASB standards'.
Please explain in detail.
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Solution Summary
This solution discusses basic translation hedging strategy, whether MNCs can reduce the foreign exchange risk, and explains why FASB 133 is one of the most complex FASB standards.
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The Basic Translation Hedging Strategy:
In diverse organizations there are separate types of the exchange rate risks faced. They include; transactional, translation and economic risk. To reduce these risks and give the corporation the opportunity to undertake their operations with ease, elements of exchange rate risk management should be considered by the organization. One of those elements is the basic translation hedging strategy. International corporations encounter a lot challenges as they cut through national boundaries to offer their services and commodities to their target market. The exposure to exchange rates variations are mitigated through the use of this basic translation hedging strategy. To allow these international organizations as well as others to have effective management of their transactions and translation risks, the companies the basic translation strategy is put in place (Jacque, 2011).
Contrary to the great employment of the basic translation strategy, their other organizations that do not utilized this strategy. The reason for this is due to; the long term investments nature in subsidiaries, the zero-sum nature that has been perceived of the current risk above the long term, impact of the cash flow and the accounting issues that are faced by the organization.
Benefits of the Strategy:
Through the basic management of the exchange rate risks ...
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