FOREIGN EXCHANGE RISK MANAGEMENT

Yasmen Mansour S Alelaiw

Dept. of Business

Clark Atlanta University

Atlanta, Georgia

Yasmen.elaiw@hotmail.com

THE HISTORICAL OF FX RATE RISK MANAGEMENT

- After the Bretton woods Fixed- parity system failed, and breakdown the dollar and gold ‘s relation, in 1970s.

- Many crisis occurred, such as, Russian Financial crisis, and Argentine peso crisis.

- IMF’s agreement.

THE CONCEPT OF FOREIGN EXCHANGE RATE RISK

The foreign Exchange rate risk is a realizable direct or indirect gain or loss in the firm as a result of unpredictable of exchange rate changes on the value of the firm .

Identify the categories of

FX risk

MEASUREMENT a

EXCHANGE RATE RISK

MANAGEMENT OF

EXCHANGE RATE Risk

THE CATEGORIES OF FX RATE RISK:

Transaction risk

Translation risk

Economic risk

MEASUREMENT OF FX RATE RISK

The value-at-risk (VaR) is an estimate the riskiness of a foreign exchange position (the decline in market value of a foreign exchange position) under period the normal market condition, as a result of, a firm’s operation in which the foreign exchange change is involved.

MANAGEMENT OF FX RATE RISK

forward

contract

futures

contract

Options

contract

Swaps

Hedging is a strategy that aim to protect an individual investor, or a companies, which use hedging strategy, via the utilization of financial derivative contracts in order to minimize the effect of unpredicted exchange rate in market in their multinational operation.

FORWARD CONTRACT

FORWARD CONTRACT

PRICE FIXATION PAYMENT + SHIPMENT

TODAY FUTURE

TIME

FIX RICE

FUTURES CONTRACT

OPTIONS CONTRACT.

SWAPS

FIXED

FLOATING

8.65%

8.50%

LIBOR+ 0.55%

LIBOR+ 0.70% 8.50

% LIBOR+1.50%

BANK AB

PROS AND CONS AS FOUND IN ACADEMIC LITERATURE

- Less experience VS substantial speculative risk.- impossible to measured.- Business in domestic currency VS remain in competitive - encumbrance and cost of FX risk management.

HEDGING PRACTICES BY U.S.A , JAPAN, INDIA FIRMS

Forward contract

Future contract

Options contract

Swaps

Forwardcontract

Options contract

swaps

Forward contract

Option contract

swaps

CONCLUSION

QUESTIONS

THANK YOU FOR YOUR ATTENTION