Preview
Preview

Exchange Rate Mechanisms - Currency Hedging Essay

No Works Cited
Length: 906 words (2.6 double-spaced pages)
Rating: Orange      
Open Document




- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Exchange Rate Mechanisms Paper - Currency Hedging

Exchange Rate Mechanisms Paper - Currency Hedging
Currency hedging involves deliberately taking on a new risk that offsets an existing one, thereby reducing a businesses' exposure to negative change in exchange rates, interest rates, or commodity pricing (Economists.com, n.d.). "Currency hedging allows a business owner to greatly reduce or eliminate the uncertainties attached to any foreign-currency transaction" (Fraser, 2001). It is impossible to predict the how much a currency will be worth on the exact day that a company will be converting it. With hedging, the uncertainly is gone. Many companies that have international operations are constantly juggling multiple transactions, with payments that are staggered and tied to the swing of a number of currencies.
There are a growing number of banks as well as business to business websites that offer currency hedging, regardless of company size. It used to be that the only way to truly avoid the risk of currency fluctuation was to transact all international business in U.S. dollars. For small companies, especially, it would be hard to insist on these terms (Economists.com, n.d.). There are a number of currency hedges, including: spot contract; forward transactions; options; currency swaps; and non-deliverable forwards (Wachovia, n.d.).
Spot contracts are a way of converting currency from another country into U.S. dollars or for making a payment in foreign currency. Currency can be bought at today's exchange rate, and in most cases, the final settlement occurs in two days. Forward transactions are very popular, especially for those just getting into currency hedging. Forward transactions allow a company to buy or sell a currenc...


... middle of paper ...


..., all international business transactions would be paid in U.S. dollars and there would be no need for currency hedging. Unfortunately, many customers and suppliers will not go along with those terms. Businesses that hope to successfully operate internationally will do well to fully educate themselves relative to the benefits that currency hedging offers.


References
Economists.com (n.d.). Economics A-Z. Retrieved October 4, 2005, from htto://www.economist.com/research/Economics/alphabetic.cfm?TERM=HEDGE
Fraser, J. A. (2001, March). Follow the big guys. Inc. Magazine, , . Retrieved October 4, 2005, from http://www.inc.com/magazine/20010301/22118.html
Hill, C. (2003). International business: Competing in the global marketplace (3rd ed.). New York: The McGraw-Hill Companies.
Wachovia (n.d.). Currency hedge tools. Retrieved October 3. 2005, from www.wachovia.com


Click the button above to view the complete essay, speech, term paper, or research paper

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »







This essay is 100% guaranteed.


Title Length Color Rating  
Is it Hedging with Currency Derivatives Optimal for a Company Essay - Gaining a better understanding of derivative securities with regard to hedging opportunities is essential in today’s financially-driven market. Financial derivative securities are used by many businesses to protect against risks or to profit from them. A company interested in protecting against the risk of some event would be engaging in hedging activities while one seeking to profit from a future event would be speculating (Eiteman, Stonehill, & Moffett, 2010). Hedging and speculation activities can be used against various types of risks faced by companies including those associated with interest rates, costs of commodities, and currency exchanges....   [tags: financial derivatives,foreign currency,total risk]
:: 4 Works Cited
1802 words
(5.1 pages)
Powerful Essays [preview]
Currency hedging Essay - What is hedging. Hedging is a strategy used to protect risks posed by worldwide currency fluctuations. One hedges the currency risk by contracting to sell foreign currency in the future, at the current exchange rate (Fries). If fund managers think the dollar is going to be stronger when they are ready to change the foreign currency back into American dollars, then they take out a foreign futures contract (a hedge). Thus, they lock in the exchange rate beforehand, so that they will not lose profits gained from holding devalued foreign currency (Hedging, 1999)....   [tags: essays research papers] 933 words
(2.7 pages)
Better Essays [preview]
Cost and Benefit of Hedging Risk Using Financial Derivatives Essay - Finance theory does not provide a complete framework for explaining risk management under the fluctuated financial environment in which firm operates. Hence, for corporate managers, they rank risk management as one of their top priorities. One of the strategies to reduce risk is by hedging. This paper will discuss the advantages and disadvantages of hedging risk using financial derivatives. Hedging depends across various motives. For example, if a manager intends to minimize corporate taxes, he will hedge taxable income....   [tags: priorities, stragties, hedging] 818 words
(2.3 pages)
Better Essays [preview]
The Strategic Risks and Financial Strategy of International Market Expansion - Mars, Inc. investment abroad considers its foreign operations utilizing the firms overall riskiness. Foreign exchange risk of expropriation and constant government intercession are increasing the political and financial risks multinational corporations encounter when functioning in a foreign continent. Mars, Inc., U.S. Corporation vends chocolates, rice, pet products, etc. abroad (Europe). Mars, Inc. must be aware of the risks involved between the euro and the dollar changes from a daily basis. The strategic risks and financial strategy to consider for possible expansion is advanced international markets increase Mars, Inc....   [tags: currency, exchange rate, foreign investment]
:: 4 Works Cited
1403 words
(4 pages)
Powerful Essays [preview]
The Benefits of Hedging Policies with Respect to Firm Value Essay - Whether hedging policy has or not an impact on the firm value needs a heavy empirical proof and there has not been reached any consensus in the scientific literature, yet. Due to this fact, this paper intends to reach a consistent evidence, in order to prove the benefits of the hedging policies in respect to the firm value and prove whether the corporate hedging affects it. II. Research Problem and Objectives The research problem The research objectives can be derived from the following questions: What determines the companies to hedge....   [tags: risk management theories] 894 words
(2.6 pages)
Better Essays [preview]
Finance Essay - INTRODUCTION The purpose of this paper is to examine if “Currency Hedging at firm level adds share-holder values”. A lot of papers have been written based on this sentence and there are many opinions that have been vented through of these researches. In a perfect world, according to Modigliani and Miller theorem, there is no reason to hedge because hedging does not add value to the firm. So, when there is not asymmetric information, taxes and transaction cost risk management is irrelevant to firms....   [tags: Foreign Currency, Hedging, Foreign Exchange] 1379 words
(3.9 pages)
Good Essays [preview]
India's Small and Medium Enterprises Export Goods Around the World Essay - ... Furthermore, the ability of different sectors to withstand the impact is not the same. For instance, the IT sector having higher margins than the handicrafts sector, can relatively withstand the adverse impact of the appreciation of the rupee to a greater level. 1. Impact on exporters: Currency fluctuation impact exporters significantly. Appreciation of currency adversely impacts exporters while depreciation benefits exporters. 2. Impact on importer: Currency appreciation or depreciation impacts importers too in the opposite way i.e....   [tags: financial, risks, hedging] 2100 words
(6 pages)
Better Essays [preview]
The European Monetary Union (EMU) - The Euro as a Single Currency Essay - The European Monetary Union (EMU) - The Euro as a Single Currency Liberalizing trade is nothing new to the world, but we have never witnessed such a vast economic integration between sovereign countries like the integration carried out in the European Union. Customs duties between European countries started to come down steadily in the early 1950s and were abolished in 1968 with the introduction of a customs union and the implementation of the common external tariff. The official proclamation of the single market on 1 January 1993 marked the ending of non-tariff barriers to trade between Member States....   [tags: Essays Papers]
:: 4 Works Cited
1609 words
(4.6 pages)
Strong Essays [preview]
Pros and Cons of the Euro Essay - Pros and Cons of the Euro The United Kingdom will not join the single European currency with the first wave of countries on 1 January 1999. The Chancellor of the Exchequer, Gordon Brown, said in October that, although the government supported the principle of the single currency, Britain would not be ready to join at least until the second wave of countries join in 2002. He added that the UK should, however, begin to prepare for monetary union. There are many possible advantages and disadvantages that the government had to consider: Advantages: 1....   [tags: Finances Money European Currency Essays] 821 words
(2.3 pages)
Strong Essays [preview]
Market Forecast Essay - Introduction As business becomes more increasingly global, it's very important that countries pay close attention to foreign exchange exposures in order to design ways of implementing appropriate strategies to properly deal with these types of exposures. In this paper I will attempt to forecast the degree of transaction, translation and the economic exposure for Russia. I will follow that by forecasting the degree of these specific areas and analyzing the various techniques used to mitigate these exposures....   [tags: Foreign Exchange International Investment] 983 words
(2.8 pages)
Better Essays [preview]