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Published on May 23, This presentation covers foreign exchange risk definition, types, management and measurement. Hedging tools and techniques; both internal and external are also discussed.

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TYPES OF RISKSExchange RateExposureTranslationexposure notinvolving any cashflow Economicexposure involving cashflow Transactionexposure involving presentcash flow Real operatingexposure involving futurecash flow 5Mrs.

Balance SheetItemsRs Historicalrate Rs. Such exposure to fluctuating exchangerates can lead to major losses for firms. It has to receivepayment in 2 months but within this period USDdepreciates. Ifforeign currency appreciates, the burden ofborrowing will be more in terms of domesticcurrency and vice versa. In the meanwhile the rupeedepreciates; the amount of dividend to be receivedby parent company in dollars will reduce and causeloss to parent company. Input resource market and Product Market Retail.

If bothPrice and Cost are equally sensitive, or if neitherPrice nor Cost are sensitive, then the firm has nomajor operating exposure15Mrs. Ford Mexicana subsidiary of Ford in Mexico ,imports Fords into Mexico that are built by Ford in the U. Assume Peso depreciates, USDappreciates.

Forex hedging strategy ppt

Ford Mexicana competes against Mexican carmakers whose peso costs did NOT rise in a competitivemarket for cars, parts and service. Demand is highly elastic,price sensitive. Ford Mexicanas peso cost of imported U. Fords has gone up, but it cannot pass on the higher cost in theform of higher peso prices for its cars without losing sales andmarket share. It is at a competitive disadvantage, an importer,when the peso depreciates.

Ford Mexicanas Cost is sensitive to ex-ratechanges, but its price in pesos is not. Profit margins will besqueezed, reflecting the operating exposure. There are no domestic Mexican automakers, and FordMexicana faces only import competition from other U. When peso depreciates, all firms will chargehigher peso prices in Mexico, offsetting some or all of the increasedcosts, maintaining the profit margins per car in dollars.

There is lessoperating exposure under this scenario compared to the firstscenario. If itcan shift sourcing of parts, and even some or all production toMexico, more of its costs will be in pesos, making the firm lessexposed to changes in the dollar and peso.

The typicalholding period is 1 day. The usual confidence levels are 99 percent and 95percent. Foreign exchange risk and hedging Foreign Exchange Risk Management Currency Risk Management.

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