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foreign exchange planning - overall long-term strategy

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1. How does making foreign exchange planning a part of overall long-term strategy enable companies to exploit opportunities?

2. Should an MNC always try to hedge its foreign exchange risk? Why or why not?

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Solution Summary

The solution explains how making foreign exchange planning a part of overall long-term strategy enables companies to exploit opportunities. An explanation of if MNC should always try to hedge its foreign exchange risk is given.

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How foreign exchange planning as part of overall long-term strategy enables companies to exploit opportunities:

A company involved in international trade is exposed to foreign exchange risk due to fluctuating foreign exchange rates and this risk can affect a business in different ways. Fluctuations in foreign exchange rates affect the conversion currencies in the balance sheet and may result in changes in a company?s competitive position (O?Leary, 2010). The main strategy employed by companies to manage foreign currency risk is through hedging. There are different tools that can be used in hedging against foreign currency risk and this includes the use of spot contracts, currency swaps, call and put options, future contracts, and stops loss orders.

Foreign exchange planning can be effective strategy in avoiding risks associated with currency transactions. One of the benefits offered by foreign exchange planning is ability to budget resources and this can be helpful in evaluating whether the business will be able to exploit opportunities. A business can enter into forward contracts with partners and therefore specifying exchange rate and the business is able to determine the costs that it will incur and subsequently facilitating budgeting and effective allocation of resources. Foreign exchange planning also outlines any financial impediments that a business could encounter in conducting operations in a certain country.

Another way in which foreign currency planning is beneficial to an organization is that it reduces the effect that foreign exchange rate has on profit ...

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