International Finance - Assignment Example

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International Finance

There are mainly three types of foreign exchange risks or exposures.This is also known as accounting risk, which a firm faces when it has subsidiary operations in other countries. When the foreign exchange movements adversely affect the translated values of assets and liabilities of the subsidiaries, it becomes an unwanted exposure for the parent company’s consolidated financial statements. This risk can be hedged by using currency futures, currency swaps etc.Transaction Exposure: This exposure is related to the future payments and receipts in foreign currency. Companies many a times limit this type of exposure by requiring the cash flows to be received and made in the home currency rather than foreign currency. Another way to minimize this risk is netting out the exposure by a lot of different currencies or only in one currency (Jacque, 1997, p.177). This is done by large corporations with significant amounts of international operations. Other techniques for alleviating short-term currency risks are currency forwards, currency futures, money market hedge, option hedge and cross hedge (Kelley, 2001, pp.32-34).Economic Exposure: This exposure is faced by corporations with large international presence and relates more with the net present value of future cash flows of a firm. The management of economic exposure involves the use of complex instruments and strategies besides the foreign exchange management (Ajami and Goddard, 2006, pp.110-111) ...
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There are mainly three types of foreign exchange risks or exposures.This is also known as accounting risk,which a firm faces when it has subsidiary operations in other countries. This risk can be hedged by using currency futures, currency swaps etc…
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