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MBAGrad
MBAGrad, Master's Degree
Category: Business and Finance Homework
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What is meant by foreign exchange risk? What specific problems

Resolved Question:

What is meant by foreign exchange risk? What specific problems does foreign exchange present in an organization? How could an organization needing Euros in six months protect itself from currency fluctuations?
Submitted: 5 years ago.
Category: Business and Finance Homework
Expert:  MBAGrad replied 5 years ago.

MBAGrad :

Hello! I'll be glad to assist you. I can provide a response later this evening or morning at the latest. Please let me know if this is acceptable. Also, is there a length/word requirement? Thanks.

Customer:

no requirement and that would be great

MBAGrad :

OK, I'll have a response to you by early tomorrow. Thanks.

Expert:  MBAGrad replied 5 years ago.
What is meant by foreign exchange risk? What specific problems does foreign exchange present in an organization? How could an organization needing Euros in six months protect itself from currency fluctuations?

Response:

When companies exchange foreign currency, this holds a certain amount of risk known as foreign exchange risk. The risks associated include many currencies and foreign exchange rates are volatile, meaning that they experience high levels of uncertainty, depending on fluctuating inflation rates and unstable economies. The risk is that currency rates go up and down, so this may work in the organization's favor or it may not, leading to sometimes significant financial loss.

An organization needing Euros in six months can help protect itself from currency fluctuations by working with its financial institution to choose a hedging option. In this instance, this means insuring that the currency rate doesn't take a negative turn in the future for the business.

As another option, the organization may set up a foreign currency account maintained by the bank. This is a transactional account set up in the home country's currency and it is managed by either the bank in the home country (as an onshore account), or by a bank in another country (as an offshore account.)


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