Currency hedging Essay -- essays research papers

What is hedging? hedging is a strategy utilise to protect gambles posed by worldwide coin fluctuations. One hedges the cash fortune by contracting to sell outside capital in the future, at the current substitute rate (Fries). If fund managers think the ane dollar bill is going to be stronger when they are ready to change the foreign capital back into Ameri idler dollars, then they take out a foreign futures contract (a hedge). Thus, they lock in the exchange rate beforehand, so that they go out not lose profits gained from holding devalued foreign currency (Hedging, 1999). If the manager guesses correctly, he will boost the funds boilers suit return because the profits will be worth even more when they are exchanged into American dollars.The foreign exchange market is hotshot of the most important financial markets. It influences the relative scathe of goods between countries and can shape trade. It influences the price of imports and can have an effect on a countrys price level (inflation rate). In addition, it influences the international investing and financing decisions. Exchange rates present many risks to a troupe and a company must be able to hedge itself (Gray, 2003). The price of one currency expressed in terms of another currency is called an exchange rate (Gray, 2003). Foreign investors need to sell in a foreign currency to be competitive. By making the most of the exchange rate risk, it may take away some of the risk of the embroil border trade from customers. This in turn may encourage a customer to buy products.Exchange rates are the amount of one countrys currency needed to purchase one social unit of another currency (Gray, 2003). Typically, vacationers wanting to exchange money will not be bothered with shifts in the exchange rates. However, for multinational companies, dealing with effectively large amounts of money in their transactions, the rise or fall of a currency can mean receiving a surplus or a deficit on their ba lance sheets, which is an example of translation risk. Translation risk is more of an accounting issue, and refers primarily to the impact of exchange rates on earnings and balance sheet items (Hedging, 1999).Another type of exchange risk faced by multinational companies is transaction risk. If a company sells products to an afield customer, it might be subject to transaction risk. Transaction risk refers to actual conversions of cash flows from one c... ...to the American dollar will affect the score loss or gain on the investment when the money is born-again back. This risk usually affects businesses, but it can also affect undivided investors who make international investments, also called currency risk (Investorworld).Referenceshttp//www.investorwords.com/1808/exchange_rate_risk.html retrieved February27, 2005Fries, Bill. Thornburg Articles. Currency Hedging retrieved February 24, 2005 fromhttp//www.thornburginvestments.com/research/articles/Currency%20Hedging.aspGray, Phil and Irwin, Tim. (2003). Allocating Exchange Rate Risk in mysteriousInfrastructure Contracts retrieved February 24, 2005 fromhttp//rru.worldbank.org/Discussions/Topics/Topic21.aspxHedging Currency Risk with Options and Futures retrieved February 25, 2005 fromhttp//www.goldencapital.com/research/reports/hedging.htmKaepplinger, Peter (1990). The certified public accountant Journal Online Foreign currency hedging transactions under subsection 988Temporary regulations Retrieved February 24, 2005 from http//www.nysscpa.org/cpajournal/old/08660556.htm