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2.0 Identify any exchange rate risk. Analyze and critically discuss how the company manages exchange rate risk.
3.0 Identify any country and political risk. Analyze and critically discuss how the company manages country and political risk.
4.0 Discuss and justify your recommendations for the company’s operations, exchange rate risk management and country/political risk.
According to Allayannis, Ihrig, and Weston (2015), the vital part of the decision of any company regarding foreign currency disclosure is known as Exchange rate risk management. Currency risk hedging techniques decrease the risk; understand the impact of the risk on the financial agents’ and strategies’ actions for dealing with resultant risk insinuations according to Barton, Shenkir, and Walker, (2014). As there are some difficulties in measuring and recovering the existing risk, sometimes the selection of proper hedging technique becoming a tough job. According to Papaioannou (2015), collapsing the Bretton Woods system and the ending of the U.S. dollar peg to gold in 1973, increase the need for currency risk management. Maximum international companies have risk teams to watch the fund’s techniques for handle the exchange rate risk according to Lam, (2014).
As a result, companies introduce risk management matters and strategies. In opposition, international investors typically handle their exchange rate risk separately from the fundamental resources and/or responsibilities. In this paper, the standard measure of exchange rate risk is focused on, explores exchange rate risk management and evaluates the impact of different hedging access on companies. It watches over the foremost risks that have a great impact on companies’ foreign currency disclosure and becomes more attentive about the strategies on hedging contract and balance sheet currency risk. It disagrees that sensible organizations of international companies need currency risk hedging for their foreign contract, translation and financial actions for eliminating probable difficult currency impacts on their success.
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2.0 Identify any exchange rate risk. Analyze and critically discuss how the company manages exchange rate risk
2.1 Definition and types of exchange rate
Madura (2016) said that generally the impact of sudden exchange rate changes on the asset of the company is known as exchange rate risk. Particularly, the probable direct or indirect loss in the company’s cash flows, properties and responsibilities, net revenue and consecutively, the stock market share. For keeping the exchange rate risk natural in the functions of international companies, every company requires to identify the particular kinds of existing risk disclosure, the hedging techniques and the accessible gadgets for dealing with these currency risks. As the International companies are performing internationally, they become the contestant in currency markets. For identifying the effect of exchange rate movements on a company that is occupied in foreign-currency entitled dealings, i.e., the implicit value-at-risk (VaR) we have to find out different risks that the company is faced according to Hakala and Wystup, (2015). In this paper, three main types of exchange rate risk are discussed in accordance with Shapiro, (2014); Madura, (2013):
- Transaction risk: Mainly it is the cash flow risk. It deals with the impact of exchange rate moves on transactional account disclosure involved with available, chargeable or repatriation of bonuses.
- Translation risk: Mainly it is balance sheet exchange rate risk and relates exchange rate moves to the assessment of a foreign supplementary and, consecutively, to the integration of a foreign supplementary to the main company’s balance sheet. It is generally measured by the disclosure of net property to possible exchange rate progress.
- Economic risk: Mainly it is the risk of the companies’ future investment. Finally, it is worried about the impact of exchange rate changes on profits and functioning costs. It is generally used to the future investment of a company’s main and foreign supplementary. It is important to find out the different kinds of currency risk and their measurement for improving the techniques to handle the currency risk.
One of the risks of the foreign exchange rate is the deficiency of financial ability and for this sometimes government do not provide the loan in current years. Many countries have faced continuing financial shortages and quick money-supply increases. So in these countries, inflation rates remain high and devaluation emergencies are seen many times. One country’s devaluation makes an impact on that of others……………………