Managing Exchange Rate Risk (SLP) Essay Example | Topics and Well Written Essays - 500 words

Managing Exchange Rate Risk (SLP) - Essay Example The discussion will begin with the statement that with respect to the proposed questions, taking Euro as the country’s currency and converting $90000 into Euro at the present rate. The present rate is USD/Euro = 0.7452, which gives Euro 67068 on the ongoing rate. Â  There is a mixed trend of the exchange rate, initially a decreasing trend from Nov30, 2011 to Dec2, 2011 then an increasing trend but still not close to what it was in the beginning of the week. It clearly shows volatility in the rates. When comparing daily values for the last week of December 2010, a clear decreasing trend is shown. It is reflecting the weakness of dollar value and the need to hedge the risk of losing value. While analyzing the trend in the last week of Dec 2009, it can be observed that there is a similar decreasing trend in the rates but an increase on the last day of the year. Hedging of Foreign exchange risk depends on the volatility in the exchange rates value of the currency with which the c ompany is doing business. A company working in Europe has to clearly identify the past trends of the USD/Euro in order to see the significant impact on its investment. After going through the trends and the decreasing value of the dollar, the company is very much prone to foreign exchange risk. The company should definitely hedge its currency to cover itself from negative fluctuations which might impact its financials. When a company operates internationally it is exposed to fluctuation in the exchange rates and it needs to hedge itself against it. When profit is to be exchanged in the domestic currency of operations, the negative changes in exchange rate impacts the profit. Similarly, when dealing with foreign exchange transaction and portfolio, an individual or a company is exposed to foreign exchange risk. In the above case, the trends clearly show that the company operating in Europe needs to hedge its currency in order to minimize the impact of exchange rate fluctuations.