The Exchange Rate
The Exchange Rate
Multi-national Corporation like Coca-Cola has all the reasons to worry about Exchange rate in the current volatile market. Investors and multinational Companies importing of exporting goods and services or even making foreign investments throughout the world economy get visaged with a swap over rate risk, which can have, relentless financial ramifications if not managed accordingly. Multi-national investment companies risk an exposure called Transactional exposure. This exposure occurs to a firm, which has contractual cash flows (payable and receivable) whose values are subject to unexpected modifications in exchange rates due to a contract being subjugated in a foreign currency.
On the other hand, economical exposure on the same firm is another exposure, which can cause worry to a multi-national business if it is not managed appropriately. When a firm has economical exposure, to the extent that its market value is subjective by unforeseen exchange rate, will rise and fall. Such exchange rate changes can severely affect the multi-national company’s economic stability, as well as its market value.
How to manage this risk:
The foreign exchange risk can be managed by using foreign exchange hedging instruments such as forwards and options. Forward indentures fasten in future exchange rates, thereby eliminating both the negative and positive effects of currency rise and falls and can indispensably change foreign cash flows into familiar currencies sums.
Alternative and alternative formulated goods not only defend one’s corporation from adverse currency dynamics but also allow one to participate in positive activities. Furthermore, ensuring that the instruments used, the execution of the methodology employed, and the amounts of coverage selected are all congruent with one’s internal policies should be considered to be paramount for risk management. Additionally, one should take time to create a strategy that can be viable in dealing with market volatility, as it shifts both for and contrary to risk manager.
Reference:
PNC Financial Services Group (2012) Strategies for addressing volatile markets retrieved on 30th Oct 2012 from http://content.pncmc.com/live/pnc/corporate/pncideas/articles/Strategies-for-addressing-volatile-markets-Foreign-exchange-Article.pdf
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