Milestone Guidelines
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.
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.
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.
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.