Foreign Exchange Risks

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The accounts receivable equals to 245,000 euros which when converted into U.S dollars at the prevailing exchange rate of 1 euro at $1.04 will be $254, 800. The company is exposed to foreign exchange risk also known as the currency risk brought about by the market fluctuations. Possible sources of the international risk include cases where company’s loans are in foreign currency, revenue is received in foreign currency, firm engages in imports and exports, and some of the firm’s costs and incomes are denominated in foreign currency (Morgan, 2015). According to Morgan (2015), forecast and revaluation risks are the two currency risks that directly affect cash and earnings cycle. The exchange risk affects a company’s profitability hence need to be managed. Two hedging ways that the company can manage currency risks include entering into forward exchange contracts or foreign currency option. Forward exchange contracts protect the company from any adverse changes in the currency rates for a given period at an agreed rate. The established rate apply even when the prevailing rates could have been of benefit to the contracting parties hence disadvantageous in such scenarios. The foreign currency option, on the other hand, protects the business from contrary rates while giving room for them to take advantage of either the rise /fall of the rates at a specified premium (Sarno, Schneider, & Wagner, 2012). Unlike the forward exchange contracts, foreign currency option spot rate is only applicable if the business stands to lose from the principal rate. It is thus a right but not a responsibility for the concerned party to take on the transaction in future. The premium in

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