Risk Management Associated With Foreign Currencies

Executive summary Risk management associated with foreign currencies has always been an issue and a challenging task for multinational companies. A firm s economic exposure to the exchange rate is the impact on net cash flow caused by the effect incurred in the exchange rate. Recently many financial instruments are being used by these firms to avoid the financial loss that can be the outcome of risky transactions. This paper aims to present a specific strategy using currency options to reduce foreign exchange risk in order to better manage it. The research results highlight the implications of the movement in exchange rate in the context of the transaction process and present a financial instrument to effectively manage this risk. More†¦show more content†¦Changes in the valuation of currencies create a form of risk widely known as currency risk. These changes can result in unpredictable gains or losses when the profits or dividends from an investment are converted from the foreign currency into domestic currency. To offset any currency-related gains or losses Firms use hedges and especially derivatives for an increased flexibility. Derivatives are both used for hedging against an undesired event and speculation for higher profit. This paper considers risk management for multinational companies, focusing on exchange rate risk management using currency options. It takes analysis from past work of previous authors on risk management and the use of currency options in an international market. The purpose of this paper is to explain and show possible different scenarios than can occur when trading in an international market by conducting a detailed research of the exchange risk management process at a single multinational company. ABC plc, the case company is a large British multinational, trading in the commodities market. 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