The term exchange rate risk is used to define the possibility that, because of fluctuation currency values, companies dealing in more than one currency may end up with more or less of a profit. In the Bruce Company's case, a fluctuation of 1.45733 Euros per Sterling denotes a negative exchange rate risk. Put more simply, the Bruce Company must pay the French company a total sum of 4.48 million Euros in four equal installments of 1.12 million Euros. Because the Sterling is currently stronger than the Euro, Bruce Company will loose money during four separate transactions in which their stronger currency is converted to the weaker currency.
Thus, Bruce Company must determine a way to hedge against the exchange rate risk, or take out another investment specifically to reduce or eliminate this risk. One way to hedge against this risk is allowing the sterling to accrue interest in a money market account. ...Show more