Question

“Companies must consider Exchange Rate Risk related to International Trade Contracts”. Discuss and analyze this quote.

Answer 1

Exchange rate have a vital role in international trade. It indicates a countries economic level or health.Exchange rate risk is the risk due to the fluctuations in currency during trade. Exchange rate is the value of one currency in terms of another currency. There will be domestic currency and foreign currency. Foreign exchange risk occurs when the transactions currency become foreign currency rather than domestic currency. Ot become a risk when there is a fluctuation in domestic or local currency.

Companies must try to reduce exchange rate risk by doing a sensitivity analysis of market by forecasts,can purchase options by which company can buy at a rate which is reasonable when the exchange rate increases,currency can be hedged,or invest in mutual funds.Exchange rate and trade surplus or deficit are mutually connected they affect each other.

If DOMESTIC CURRENCY<FOREIGN CURRENCY=EXPORT got stimulated. Import will be expensive

If DOMESTIC CURRENCY >FOREIGN CURRENCY=IMPORT become cheaper.Export will be expensive.