Exchange Rate: Effects on Profitability and Hedging Risk

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  A major risk in conducting international trade is exchange rate related risk. Exchange rates fluctuate on a constant basis and adverse movements can significantly affect revenues or profitability.

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  This is the risk that companies take, that they can risk profitability due to foreign exchange risk caused by rate fluctuations.

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  Since exchange rates are difficult to predict, the forecasted net dollar cash flows per currency may be inaccurate. Do you anticipate any offsetting exchange rate effects from whatever exchange rate movements do occur? Explain. 3.

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  Multinational corporations should hedge against foreign currency exchange risk because failure to do so can be costly in terms of profitability and cash flows.

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  McDonald's Corporation is on an expansion mode and, therefore, more importance is given to the instruments for hedging the exchange rate risk (McDonald's, 2015).

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