What is the best way for a multinational corporation to hedge against foreign currency risk?
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What is the best way for a multinational corporation to hedge against foreign currency risk?
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Solution Summary
Eight ways are discussed.
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Exchange Rate Risk
Organization which invest internationally in today's increasingly global investment arena face the prospect of uncertainty in the returns after they convert the foreign gains back to their own currency. Unlike the past when most U.S. investors ignored international investing alternatives, investors today must recognize and understand exchange rate risk, which can be defined as the variability in returns on securities caused by currency fluctuations. Exchange rate risk is sometimes called currency risk.
Action Plan to deal with risk
1. Country Diversification
It can diversify their suppliers and markets to reduce their exposure to various countries like China, India, Thailand .
2. Translation exposure
is simply the difference between exposed assets and exposed liabilities. The controversies among accountants' center on which assets and liabilities are exposed and on when accounting-derived foreign exchange gains and losses should be recognized (reported on the income statement). A crucial point to realize in putting these controversies in perspective is that such gains or losses are of an accounting nature-that is, no cash flows are necessarily involved.
Firms have three available ...
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