FOREIGN EXCHANGE RATE

Does Foreign Exchange Rate Exposure Matter for Companies Operating Internationally?

Does Foreign Exchange Rate Exposure Matter for Companies Operating Internationally?

Introduction

The study is related to the foreign exchange rate exposure. This Foreign Exchange Rate affects the organizations that operate internationally; in addition due to the fluctuation in the exchange rate, the international trade is strongly influenced. Especially with high volatility, strong exchange rate fluctuations are the revenue and cost of cross border trade businesses are no longer predictable. A change in the exchange rate between contract and delivery of high amplitude, which has a contract partner, has ever increasing losses, the other for higher profits result. There is no universally good or bad exchange rate, but the effects of exchange rate changes on businesses and industry are different. A method to hedge against exchange rate risk is the hedging.

Foreign Exchange Risk is the risk of loss due to movements in exchange rates. It stems from ignorance of the price of one currency for a transaction. Specifically, the risk of exchange rate movements in the plasma exchange in the opposite direction of this scheme. Fluctuations between exchange rate changes in the value of one currency in terms of another are variations in the exchange rate affecting the total wealth of the traders who hold positions in foreign currency. These variations give rise to some risk factor that affects the profitability of the companies.

Discussion

Interest Rate Parity

The parity of interest rates can be covered or not covered. These identities define the link between interest rates and exchange rates. The interest rate parity states that exchange rates and future include the interest rate differential. The theory of interest rate parity states that if two currencies are different interest rates, this difference will be reflected in the premium / discount of forward exchange rates to prevent the risk-free arbitrage.

If rates are 3 % of the U.S. and 1 % of Japan, then the U.S. dollar should depreciate against the Japanese yen by 2 %. This future exchange rate is reflected in forward rates today. In this example, the forward rate of the dollar is set at a discount, because the dollar is buying less of Japanese yen in the forward rate than the slot rate. Then, the yen is trading at a premium (Cruz, 2002, 12-24).

In recent years, interest rate parity is almost never worked. Currency exchange rates with a higher rate often increase as central banks try to slow the rapid growth of the economy through higher interest rates and take no action against the risk-free arbitrage.

The condition of the interest rate parity include the condition of the interest rate parity exists when the difference between the domestic and foreign interest rate differential between the actual and the expected exchange rate to be. Moreover, be higher the rate of change in the exchange rate of a country, that is, the faster the country's currency depreciates, the higher the nominal rate of this country must: Hence the following ...