Currency Risk Management: A Handbook for Financial Managers, by Gary Shoup

By Gary Shoup

Concentrates on an immense zone of excellent company perform, the prudent and skilful administration of foreign money hazard. The e-book deals an easy, direct method of figuring out the fundamental and complex techniques of forex probability administration, geared toward a extensive diversity of monetary pros.

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Page 12 Operating exposureThis concerns the supply, demand, and price variables that affect sales performance, operational profitability, and competitive position. Identifying operating exposures involves questions such as: is the product still in the consumer's reach after a shift in foreign exchange? Is it easily substituted? Is it competitive? Are the competitors' prices denominated in the same currency? Are the competitors' costs denominated in the same currency? Strategic exposureThis relates more to perception than to a specific exposure.

Manufacturer, therefore, is $500,000. The machines will be shipped in 6 months, with payment due upon arrival. For these six monthsfrom the time of contract to the time of paymentthe manufacturer has an exposure in Deutsche marks. If the rate stays the same, he will pay $500,000 as anticipated. 45 by the time the payment comes due, the manufacturer benefits. He will pay the DM1,000,000 as contracted, but the cost will be only $450,000, so he'll have a cost savings of $50,000. The risk, of course, is that the Deutsche mark might increase in value instead.

Only hindsight reveals the answer. If the dollar made a major advance against the Deutsche mark while the hedge was in place, it would produce a loss of major proportions. The fact that it was offset by a savings somewhere else may not be enough justification, especially when the loss, or "hedge burden" as it is sometimes known, is being explained to a senior manager who has had no input in the risk management program. This is the single biggest obstacle to foreign currency management. Unless there are clearly defined objectives, safeguards in place, and clear communications among the various levels of management, a hedging program can end up as a non-starter at best and a financial disaster at worst.

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Currency Risk Management: A Handbook for Financial Managers, by Gary Shoup
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