Reducing Exchange Rate Risk

QUESTION # 01

             Reducing Exchange Rate Risk:

For companies trading internationally, fluctuating exchange rates can be difficult to manage and hard to budget for. If the markets move against you it can reduce profits and in a time of tighter margins and increasing raw materials costs it is ever more important to protect yourself from exchange rate risk and make savings wherever possible. Your business can take some proactive steps towards managing foreign exchange risk,

1. Understand your business objectives

Your business objectives play an important role in defining an FX policy and it is important to know what degree of risk your company is willing to take and how much your FX exposure could impact on your business objectives.

2. Develop a foreign exchange policy and review it regularly

It is important that your policy complies with and works towards overall strategy and objectives. Once agreed, a policy should be reviewed regularly and be flexible enough to reflect the constantly changing nature of the markets.

3. Take information from a variety of sources

Information from varied market sources means a rounded view. Money corp Dealers are MSTA (Members of the Society of Technical Analysts) qualified. As experienced market traders they will use their expertise to ensure your company receives the best information and guidance on the markets.

4. Foreign-currency account

Setting up a Foreign-currency account so you can accept payments or pay bills in a foreign currency. You can use multiple Foreign-currency accounts if required.

5. Forward Exchange Contract

Using a Forward Exchange Contract to buy one currency amount and sell another at a fixed exchange rate on an agreed future date. This means you know exactly how many NZD you’ll pay for imports or receive for exports, and you can protect your business when exchange rates turn for the worse.

6. Currency Options:

Currency options offer another feasible alternative to hedge exchange rate risk. Currency options give an investor or trader the right to buy or sell a specific currency in a specified amount on or before the expiration date at the strike price.

7. Payments from foreign companies in U.S. dollars only

Accept payment for goods and services from foreign companies in U.S. dollars only. The risk is mitigated because the currency rate of exchange between the home company and the foreign company is no longer a factor, since both companies are only using the U.S. dollar.

QUESTION # 02

                Reduce Exposure to Host Government Takeovers

To reduce the chance of a takeover by the host government, firms often use the following strategies:

ŒUse a Short-Term Horizon;

This technique concentrates on recovering cash flow quickly.

Rely on Unique Supplies or Technology;

In this way, the host government will not be able to take over and operate the subsidiary successfully.

ŽHire Local Labor;

The local employees can apply pressure on their government.

Borrow Local Funds;

 The local banks can apply pressure on their government to keep u in operation so as to meet the debt with the banks.

Purchase Insurance;

Investment guarantee programs offered by the home country, host country, or an international agency insure to some extent various forms of country risk.

Question # 03

                Techniques to access country Risk:

1. Checklist approach
2. Delphi technique
3. Quantitative analysis
4. Inspection visits

• A checklist approach involves rating and weighting all the identified factors, and then consolidating the rates and weights to produce an overall assessment.
• The Delphi technique involves collecting various independent opinions and then averaging and measuring the dispersion of those opinions.
• Quantitative analysis techniques like regression analysis can be applied to historical data to assess the sensitivity of a business to various risk factors.
• Inspection visits involve traveling to a country and meeting with government officials, firm executives, and/or consumers to clarify uncertainties.
• Often, firms use a variety of techniques for making country risk assessments.
• For example, they may use a checklist approach to develop an overall country risk rating, and some of the other techniques to assign ratings to the factors considered.