Measuring and Managing Foreign Exchange Risk Dissertation

Measuring and Managing Foreign Exchange Risk - oration ExampleAlthough a firm may hedge its foreign exchange contracts, limiting its transaction pictorial matter, stinting exposure is difficult to estimate and further, hedge. Economic exposure arises because future profits from operating as importer or exporter depend on exchange rates, and due to its nature, this type of exposure is difficult to mute. (Faff & Iorio 2001, Mullem & Verschoor).(Mullem & Verschoor, 2005). However, there is greater complexity between the relationship between exchange rate fluctuations and competitiveness and this leads to difficulty in correctly estimating stinting exposure and hence hedging it efficiently (Mullem & Verschoor, 2005).Firms that do business abroad must be earn to account for changes in exchange rates that lead to variability in their cash flows. (Solt & Lee, 2001). Transaction exposure reflects the risk that exchange rates change between the succession a transaction is recorded and th e time actual receipt of cash or payment of cash is made. (Solt & Lee, 2001). Due to its short-term nature futures and forrad can be used to hedge transaction exposure and thereby eliminate its influence on the value of a firm. (Solt & Lee, 2001). Economic exposure, on the other hand, is the long-term effect of exchange rate changes on the future cash flows and thereby on stock returns. (Solt & Lee, 2001).