Foreign Exchange Risk Management Analysis

Subject: Business    / General Business
Question
You will submit your Foreign Exchange Risk Management Analysis. Your analysis should include foreign
exchange risk net exposure and the tools or techniques your chosen company currently uses to mitigate
the risk. In Milestone Two, you will also analyze the company’s hedging characteristics and other
potential risks that might arise from this imperfect hedge.
Specifically, the following critical elements must be addressed:
Foreign Exchange Risk Management Analysis: Analyze the firm’s transactions, its foreign exchange rate
risk exposure, and the tools the firm currently uses to mitigate the risk. 1. a) Explain the firm’s specific transactions, which are the accounts payable and accounts receivable, and how these transactions expose the firm to foreign exchange rate risk. Some firms
could be exposed to both of the accounts because they import raw materials from foreign
countries, add value to the product, and then re-export the product to other foreign countries.
However, the net exposure must be only one account. 2. b) Identify the tools the firm currently uses in mitigating the foreign exchange rate risk.
Occasionally, firms utilize more than one tool to hedge the risk. Some examples are using foreign
debt to hedge the foreign income, or using derivatives such as currency swaps, futures,
forwards, or options. 3. c) However, most of the time, the company does not fully hedge its exposure to the foreign
currency. You must explain the percentage hedge of its exposure as well as the hedging time.
Then, you must provide the potential risk to which the company could still be exposed from the
foreign exchange rate.
Guidelines for Submission: Milestone Two must be submitted as a two- to three-page Microsoft Word
document with double spacing, 12-point Times New Roman font, and one-inch margins; use at least
three scholarly sources; and be cited in APA format.
Instructor Feedback: This activity uses an integrated rubric in Blackboard. Students can view instructor
feedback in the Grade Center. For more information, review these instructions. Critical
Elements Proficient (100%) Needs Improvement (70%) Not Evident (0%) Foreign
Exchange Risk
Management
Analysis Analyzes the firm’s specific transactions:
accounts payable and accounts
receivable, and how these transactions
expose the firm to foreign exchange rate
risk by providing evidence of each
transaction Analyzes the firm’s specific
transactions and the
possible exposure to risk,
but does not provide
evidence of each
transaction Value Does not analyze the
firm’s transactions or
30
possible exposure to
risk Foreign
Exchange Risk
Management
Analysis Identifies the tools the firm
Identifies the tools the firm currently
currently uses in mitigating
uses in mitigating the foreign exchange the foreign exchange rate,
rate risk by providing examples
but does not provide
specific examples Foreign
Exchange Risk
Management
Analysis Analyzes the
Analyzes the percentage
percentage hedge of
hedge and the hedging time
the company’s exposure
of the company’s exposure,
and the hedging time
but the submission does not
length by providing
include specific examples
specific examples Articulation of
Response Submission has no
major errors related to
citations, grammar,
spelling, syntax, or
organization Earned Total Submission has major errors
related to citations,
grammar, spelling, syntax, or
organization that negatively
impact readability and
articulation of main ideas Does not identify the
tools the firm
currently uses to
30
mitigate the foreign
exchange rate Does not analyze the
percentage hedge and/or
the hedging time of the
company’s exposure 30 Submission has critical
errors related to citations,
grammar, spelling, syntax,
10
or organization that
prevent understanding of
ideas 100%