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Exposure to Currency Risk: Definition and Measurement
Finance & Accounting
Pages 8 (2008 words)
Exchange rate risk is the risk that the company or investors have to face because of changes in the exchange rate (Adler, & Dumas, 1984) and when the company will be making investment in Euro Zone then it will have to face risk because of changes in the value of currency of Euro and Pound Sterling. …
Currently the board of directors of the company are analysing the feasibility of setting up a subsidiary company in European Union. However in order to start a new subsidiary company it is important for the management to know what important concepts and factors they have to consider while moving from one state to another. This report analyse important concepts that the management should know while setting up a new subsidiary in European Union. This report to the CEO of the company is mainly divided into three parts; the first part explains about the foreign currency translation and related terms, the second part explains about the feasibility of forecasting spot and forward rates of exchange and how management can use it effectively for the company, and the third part explains the internal and external hedging techniques.
FOREIGN CURRENCY TRANSLATION
The rate at which one currency is exchanged for the other currency is called as the Exchange Rate or foreign exchange rate (O'Keefe, 2010). As in this case, the sterling to euro exchange rate is 0.90 therefore it means that for the value of one unit of pound sterling to euro is 0.90 and one unit of euro can exchanged for 0.90. There are two important concepts to be considered; sport exchange rate and forward exchange rate. ...
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