Foreign Exchange Risk Management

Topics: Foreign exchange market, Exchange rate, Risk management Pages: 39 (14148 words) Published: March 3, 2013
The survey of foreign currency risk awareness and management practices in Tanzania REVIEW OF LITERATURE
Foreign exchange risk management
Foreign currency exchange risk is the additional riskiness or varience of a firm’s cash flows that may be attributed to currency fluctuations (Giddy, 1977, Brigham and Ehrhardt, 2005). Normally, foreign currency risk exists in three forms; translation, transaction and economic exposures. Foreign currency risk management involves taking decisions which aim at minimizing or eliminating the negative effects of currency fluctuations on balance sheet and income statement values, a firm's receipts and payments arising out of current transactions, and on long term future cash flows of a firm. Creativity by managers and innovations in financial instruments have, over the years, made available to firms a number of avenues that can be followed in managing the impact of foreign currency rate fluctuations. These avenues are known more commonly as hedging techniques. A hedge is a means of defence against possible loss. Hedging is the process of reducing exposure, and consists of a number of techniques intended to offset or minimize the exchange risk of loss on assets or liabilities which are denominated in a foreign currency. Some hedging techniques can be implemented within the firm, i.e. without involving any market-based financial instruments. These are known as internal hedging techniques. All other techniques necessitate taking recourse to market - based financial instruments. These are external hedging techniques. RESEARCH METHODOLOGY

This research was conducted mainly in the form of a survey. It captured individuals' opinions and assessment of foreign currency risk management awareness, practices and competencies. In training institutions, assessment of foreign currency risk management training was made by appraising contents of course outlines. The objective of appraising course outlines was to gauge the adequacy of course syllabi in these institutions in preparing trained graduates who are able to function, among others, in the area of foreign currency risk management. The survey focused on firms and professionals within firms as well as recent graduates of the leading two business schools in Tanzania. Interviews were also held with bank officers with the specific interest of appraising the availability of products and services to mitigate the effect foreign currency risk on businesses. REFERENCES: Adler, M (1982)"Translation Methods and Operational Foreign Exchange Risk Management," in G. Bergendahl (Ed) International Financial Management, Stockholm, Norsteds. REVIEW 2

How is foreign exchange risk managed? An empirical study applied to two Swiss companies. ABSTRACT
This paper investigates how two Swiss companies manage their foreign exchange risk and compares the results to theoretical findings and to previous empirical research. We find significant differences in the foreign exchange risk management policies, notably in the choice of the type of exposure to cover and in the hedging instruments used. Consistent with previous research, forwards and netting are the most used instruments and transaction exposure is the most managed foreign exchange risk. Surprisingly, translation and economic exposures are not well identified and managed mainly because firms believe it is unnecessary or too complex. Finally, firms hedge their exposure but never fully due to high cost of hedging. REFERENCES: Allayannis, G., and J. Weston, “The use of Foreign Currency Derievatives and Firm Market Value”, Review of Financial Studies 14, 14, 2001, 243-276.

This dissertation studies on-balance-sheet and off-balance-sheet foreign currency risk management of corporate firms and commercial banks. It is comprised of two essays. The first essay investigates what determines firms‟ foreign currency spot net asset positions,...

References: Beaver, W. H.; Parker, G. (1998): Risk Management: Problems and Solutions, 3rd edition, Stanford University, Financial Services Research Initiative, McGraw-Hill
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