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Due to omnipresent globalization throughout the world today, all multinational corporations are subjected to multi-faceted foreign exchange...

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Finance

Due to omnipresent globalization throughout the world today, allmultinational corporations are subjected to multi-faceted foreignexchange regulations, which impact their business operations andimpact their financial success. At the business level, currencyrisk is called FX exposure. Identification of currency risks hasbecome a crucial task for all multinational corporations and theability to measure FX exposure is vital.

  • Discuss how multinational corporations manage foreign exchangerisk.
  • Discuss how some multinational corporations hedgecurrency.

Answer & Explanation Solved by verified expert
4.4 Ratings (625 Votes)
How multinational corporations manage foreign exchange risk Foreign exchange risk refers to the losses that an international financial transaction may incur due to currency fluctuations Also known as currency risk FX risk and exchangerate risk it describes the possibility that an investments value may decrease due to changes in the relative value of the involved currencies These are all excellent reasons to take a handson approach to FX risk management And while setting up a solid FX risk management program isnt trivial its well within the reach of any company willing to make the effort To create your own program youll need to take the following steps Analyse your business operating cycle to identify where FX risk exists This helps you determine the sensitivity of your profit margins to FX fluctuations and the stages of your operating cycle where you need protection Calculate your exposure to FX risk This covers both unconfirmed risk the risk that exists before a sales agreement is finalized and confirmed risk the risk that exists after a firm sale is completed but you havent yet been paid Once you know your level of exposure you can decide how much risk coverage hedging you need Hedge your FX risk Hedging simply means that you use specially designed financial instruments to lock    See Answer
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