Exchange Rate Risk

Exchange Rate Risk

The exchange rate risk is defined as the probability of loss from fluctuations in exchange rates of the currencies in which they are denominated assets, liabilities and off balance sheet entity. The exchange rate risk is a market risk that affects both the banking book and the trading book of a financial institution. Exchange rate risk is the uncertainty of the value of a currency that occurs when one currency is converted into another. This source of risk applies only if the investor acquires foreign assets denominated in a foreign currency (Verdelhan, 2010).

FedEx is operating in the industry of shipping goods from one place to another that is an industry, which has a very few industries in it. This industry of shipping could be assorted as being existent in the maturity stage. FedEx has been conducting its operations globally, and thus, it has to comply according to the rules & regulations, which are there for the international firms. Since the company operates globally and extends its dimensions in different countries. FedEx is highly prone to exchange rate risk. The number of packages delivered by FedEx from USA to foreign countries has been growing at a very steady rate. The exchange risk is one of the many risks to a company. This is a result of the company's participation in foreign trade, through the realization of capital investment outside the borders of the country, buying securities in foreign currencies or simply buying and selling goods abroad.

Mitigation Strategies - Advantages and Disadvantages

There are involved different risks in the financial market for which the investors need protection. The financial market is an important place for the investors where they buy and sell the market securities. There are occurred various price changes in the market that enhance the risk of loss for the investors. The currency hedging eliminates the risk that changes in exchange rates negatively affect the profits of the enterprise. The main financial instruments currently used by companies for coverage are forward contracts, swaps and currency options. The main purpose of the exchange risk management is stabilization in the present value of future cash flows in foreign currency (Adam, 2008).

Natural Position

The natural position is the fundamental position of the company. It determines the exposure that the company against a certain currency. Each undertaking transactions business in foreign currency ends up with a natural position. However, a natural hedge is ...