Hi, need to submit a 1500 words essay on the topic As business becomes increasingly global, more and more firms will find it necessary to pay careful attention to foreign exchange exposure and to desi

Hi, need to submit a 1500 words essay on the topic As business becomes increasingly global, more and more firms will find it necessary to pay careful attention to foreign exchange exposure and to design and implement appropriate hedging strategies [Eun/ Resnick].

Finally, a conclusion, based on the findings of the study, will be presented.

Providers of funding to Multinational Corporations (MNCs) are likely to end up in insurmountable losses if the MNCs to which they led money run in to financial predicaments. This is since international business undertakings are mostly exposed to risks of exchange rates. This is the point at which the essence of hedging is felt. (Madura& Fox, 2007 p 359)

Exchange rates risk is defined as the risk to which investments are exposed due to fluctuations in the rates of exchange. Mostly, the exchange rate risks which are known are those that arise to foreign currency quoted investments. The most common investments that are exposed to exchange rate risk are purchases and sales of shares in foreign nations or even bonds.

Also, those investors who have business carrying out their operations in different countries or who indulge in exporting, are exposed to this kind of a risk. For example. a person who exports is likely to experience a decline in gross margin or even a sales revenue fall due to the local currency’s appreciation.

Hedging thus is essential to avoid relatively large swings in a business’ earnings, and is commonly undertaken over a short period of time. Therefore, most hedging instruments cover periods of less than one year. Usually, the rates of exchange are subject to fluctuations and thus, they cannot be forecasted with precision or accuracy. What remains in this situation is, for the specific firm considering hedging, to decide the magnitude of its exposure to the fluctuations of exchange rates.

Mainly, there are three kinds of risk exposures. These are Translation, economic and Transaction exposures. ( cuckee.com, 2007) Translation kind of exposure is also referred to as the accounting exposure. This occurs where the balance sheet’s as