Question

how does a multinational corporation chose to deal with its exchange rate risk.

minimum 100 words

Answer 1

Currency risk is the financial risk that arises from potential changes in the exchange rate of one currency in relation to another. And it's not just those trading in the foreign exchange markets that are affected. Adverse currency movements can often crush the returns of a portfolio with heavy international exposure, or diminish the returns of an otherwise prosperous international business venture.

Hedging

The most common method of hedging currency risk is through the use of hedging products, such as currency swaps, forward contracts and options. These products offset the chance of exchange rate fluctuation in different ways, therefore protecting a company's investment from the risk of losing value.

Balance Revenue and Expenditure

In this the organization tries to balance the revenue and expenditure. To simplify we can say that organization will buy as much in dollars as it can sell.

Pricing Mechanism

In this the risk is passed to clients in some way or other.This could be cheaper for them . Imagine interest rate differentials are too high. A company can hedge but can pass that Hedging cost to its clients in some way and thusvcan reduce its risk.