Question

Critically discuss the importance and techniques of foreign exchange risk management and evaluate the basic hedging strategies involved. Use examples with calculations to demonstrate your knowledge. (500 words)

Answer 1

The Importance of foreign risk management that at the time of investment made in foreign currency, it is important to bring out the basic concept like minimum loss occurs while investing in foreign currency. Many companies occurs heavy type of loss and by this loss the companies can not run as a concept taking going concern.

It is important factor for companies investing in foreign currency by which business can create large or more earnings to run their business internationally.

Techniques of foreign Exchanges risk management or forcasting exchange rate-

1. Technical Forcasting - Technical forcasting involves the using of historical data to predicts the future values are known as technical forcasting.

2. Fundamental forcasting - Fundamental forcasting are based on relationship between economic variables and exchange rates are known as fundamental forcasting.

3. Mixed Forcasting - Mixed Forcasting is the combination of forcasting techniques are known as mixed forcasting.

4. Market based forcasting - It is uses for market developers like spot rate, forward rate etc. to develop forcast are known as market based forcasting.

Hedging Strategies involved -

1. Leading and lagging.

2. Netting.

3. Involving in domestic currency.

4. Matching.

5. Price variation.

6. Asset and laibility management.