Question

Provide guidance on how a firm could mitigate the impact of currency exchange changes: EUR/AED (Euros / United Arab Emirates Dirham)

- How should the firm approach transaction, translation, and/or operating exposure in the UAE (United Arab Emirates)

Scenario:

You are operating a German manufacturing firm in the UAE.

Answer 1

If a firm is operating as a German manufacturing firm in United Arab Emirates.

1.it can be entering into various kinds of hedging transactions in order to eliminate the transaction risk like it can enter into forward contracts which are mostly customised contracts and it can also manage is exposure through taking positions in the future contracts as well as option contract.

it can also enter into various kinds of risk sharing agreements and it can be entering into swaps like currency swaps which will be helpful in order to eliminate the risk arising out of the foreign currency fluctuations.

2. This company will also be facing a lot of translation risk due to translation of books of accounts of other subsidiaries into the parent company and it can manage the risk of fluctuation of the the foreign exchanges into the subsidiary books by starting a manufacturing process in the other country where the fluctuation is taking place in order to manage the risks so it can be various kinds of risk sharing agreements and derivative contracts through which we he can manage the translation risk.

3. Operating exposure will be leading to the the future cash flows getting affected due to changing in the foreign currency rate along with the pricing changing so we need to manage this kind of this by taking various kinds of foreign exchanges contracts of forward in nature and future contracts and it will also be taking various kinds of risk sharing agreements in order to eliminate the risk of operating exposure in foreign exchange market.