Go Back   ManagementParadise.com | Management & Business Education Learning Platform Resolve Your Query - Get Help and discuss Projects > Financial Management ( FM )

NATURE OF CURRENCY RISK

Discuss NATURE OF CURRENCY RISK within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; Currency risk or exchange rate risk arises in buying, selling, investing and borrowing. Therefore, it is essential to recognize the ...

Reply

 

Thread Tools Display Modes
NATURE OF CURRENCY RISK
Old
 (1 (permalink))
Sunanda K. Chavan
sunandaC has a spectacular aura aboutsunandaC has a spectacular aura aboutsunandaC has a spectacular aura about
 
sunandaC
Management Paradise Guru
 
Status: Offline
Posts: 6,680
Join Date: Jul 2010
NATURE OF CURRENCY RISK - October 8th, 2010

Currency risk or exchange rate risk arises in buying, selling, investing and borrowing. Therefore, it is essential to recognize the nature of currency risk and how they arise in business.

1) RISKS IN SELLING ABROAD:

A company selling goods or services abroad faces currency risk, regardless of whether its sales are priced in its domestic currency or in a foreign currency.
For e.g. suppose that a UK Company sells goods to foreign buyers.

Sales priced in sterling: If sterling strengthens, prices to foreign buyers in their domestic currency will rise. Demand will fall to an extent that will depend on the strength, or elasticity, of demand for the product. Falling sales will reduce total profits.

Sales priced in a foreign currency: If exports are priced in a currency that falls in value against sterling, the company’s sterling earnings will fall. Profit margins also will fall. The company either must accept the lower profits margins or raise prices. Higher prices could result in lower sales demand and lower profits.

2) RISKS IN BUYING FROM ABROAD

A company buying goods from abroad might be invoiced in its domestic currency, but is more likely to be invoiced in a foreign currency.

For e.g. suppose that a US company buys a range of goods from foreign suppliers.
Purchases invoiced in dollars: If the dollars weakens, foreign suppliers are likely to raise their dollar prices so that profits in their own currency can be maintained.

Costs of purchases therefore will rise. Purchases invoiced in a foreign currency: If the dollar weakens, it will cost the company more in dollars to buy the foreign currency to pay for the goods. Costs of purchases will rise.

3) RISKS FROM INVESTING ABROAD

The profits of a parent company’s foreign subsidiary, as reported in the parent company’s domestic currency, will fall if the subsidiary’s domestic currency weakens in the value against the parent company’s domestic currency. As a result multinational companies with foreign subsidiaries have constant exposure to currency risk. The value of a foreign investment will fall if the currency in which it is denominated weakens against the investor’s domestic currency.

4) RISK FROM BORROWING IN A FOREIGN CURRENCY

Exchange rate movements, as well as interest rates, affect the cost of borrowing in a foreign currency. The cost of a foreign currency loan will rise or fall if the borrower’s domestic currency weakens or strengthens against the currency in which the loan is denominated.
Currency risk would be reduced if either

 The volatility in exchange rate movements were lessened and exchange rates fairly stable, or

 Future exchange rate movements could be predicted with reasonable accuracy.

Currency Risk depends on the regularity and size of exchange rate movements. An exposure to currency risk is greater when the exchange rate could change by a larger percentage amount, i.e. when exchange rate volatility is high. Changes that might occur in the future can be estimated from changes that have occurred in the past.
Advertisements

Friends: (0)
Reply With Quote
Re: NATURE OF CURRENCY RISK
Old
 (2 (permalink))
Rose Marry
rosemarry2 is an unknown quantity at this point
 
rosemarry2
Management Paradise Guru
Status: Offline
Posts: 2,125
Join Date: Apr 2016
Re: NATURE OF CURRENCY RISK - April 15th, 2016

Quote:
Originally Posted by sunandaC View Post
Currency risk or exchange rate risk arises in buying, selling, investing and borrowing. Therefore, it is essential to recognize the nature of currency risk and how they arise in business.

1) RISKS IN SELLING ABROAD:

A company selling goods or services abroad faces currency risk, regardless of whether its sales are priced in its domestic currency or in a foreign currency.
For e.g. suppose that a UK Company sells goods to foreign buyers.

Sales priced in sterling: If sterling strengthens, prices to foreign buyers in their domestic currency will rise. Demand will fall to an extent that will depend on the strength, or elasticity, of demand for the product. Falling sales will reduce total profits.

Sales priced in a foreign currency: If exports are priced in a currency that falls in value against sterling, the company’s sterling earnings will fall. Profit margins also will fall. The company either must accept the lower profits margins or raise prices. Higher prices could result in lower sales demand and lower profits.

2) RISKS IN BUYING FROM ABROAD

A company buying goods from abroad might be invoiced in its domestic currency, but is more likely to be invoiced in a foreign currency.

For e.g. suppose that a US company buys a range of goods from foreign suppliers.
Purchases invoiced in dollars: If the dollars weakens, foreign suppliers are likely to raise their dollar prices so that profits in their own currency can be maintained.

Costs of purchases therefore will rise. Purchases invoiced in a foreign currency: If the dollar weakens, it will cost the company more in dollars to buy the foreign currency to pay for the goods. Costs of purchases will rise.

3) RISKS FROM INVESTING ABROAD

The profits of a parent company’s foreign subsidiary, as reported in the parent company’s domestic currency, will fall if the subsidiary’s domestic currency weakens in the value against the parent company’s domestic currency. As a result multinational companies with foreign subsidiaries have constant exposure to currency risk. The value of a foreign investment will fall if the currency in which it is denominated weakens against the investor’s domestic currency.

4) RISK FROM BORROWING IN A FOREIGN CURRENCY

Exchange rate movements, as well as interest rates, affect the cost of borrowing in a foreign currency. The cost of a foreign currency loan will rise or fall if the borrower’s domestic currency weakens or strengthens against the currency in which the loan is denominated.
Currency risk would be reduced if either

 The volatility in exchange rate movements were lessened and exchange rates fairly stable, or

 Future exchange rate movements could be predicted with reasonable accuracy.

Currency Risk depends on the regularity and size of exchange rate movements. An exposure to currency risk is greater when the exchange rate could change by a larger percentage amount, i.e. when exchange rate volatility is high. Changes that might occur in the future can be estimated from changes that have occurred in the past.
hey friend,

Please check attachment for Research Study on Currency Risk Management Practices of Canadian Firms, so please download and check it.
Friends: (0)
Reply With Quote
Reply

Bookmarks

Tags
currency, nature, risk
Related to NATURE OF CURRENCY RISK
 

Similar Threads

Thread Thread Starter Forum Replies Last Post
CURRENCY RISK Sunanda K. Chavan Financial Management ( FM ) 1 April 15th, 2016 05:38 PM
need proj on nature, nature synthesis jack Indian Management Thoughts and Practices ( IMTP ) 8 January 3rd, 2016 02:43 PM
Limited Risk or Limitless Risk writer11 Stock Markets Tips & Gyan !! 0 September 28th, 2009 02:10 PM
nature Intro Pankhuri Sinha Introduce Yourself !! 0 August 16th, 2009 09:48 PM
 


Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is On
Trackbacks are On
Pingbacks are On
Refbacks are Off


ManagementParadise.com is not responsible for the views and opinion of the posters. The posters and only posters shall be liable for any copyright infringement.



Search Engine Optimization by vBSEO ©2011, Crawlability, Inc.