Foreign Exchange Risk Analysis

Introduction

With the development of global economic globalization, many multinational companies have trade and investment in all parts of the world. Sometimes the business in a multinational company involves a variety of currencies.Multinational companies with a lot of foreign currency transactions often face the risk of exchange rate fluctuations. In order to manage exchange rate risk, hedging has become a strategy for many companies even the use of hedging will produce a certain cost. The report will discuss why foreign exchange rate risks need to be managed. It will also refer to the problems that may be faced by multinational corporations in various fields and the role and implementation of hedging.

Control of foreign exchange risk

Nowadays,

Raghavendra and Velmurugan focused their questionnaire survey on currency hedging practice of 100 IT companies in India. The results show that larger companies are more vulnerable to the influence of the 3-4 currencies (US dollar, euro, pound and yen), because their income is mainly controlled by overseas businesses of different currencies in different parts of the world. The results show that the foreign exchange risk is the most important financial risk for IT enterprises, and the forward contract is the best contract to reduce the risk of the India IT enterprises. The study shows that the 6-12 - month contract is the average time span of the use of monetary hedge tools by India IT companies. The survey also found that the overall attitude of the India IT companies in the implementation of the currency hedging is fairly risk averse (2014, p.592). If a multinational company has a variety of foreign exchange transactions, this is the risk of a certain exchange rate fluctuation. Therefore, if the risk is avoided, hedging is the strategy most companies are willing to choose. Petrusheva argued that the importance and significance of financial risk management in international trade financing is great. Hedging is one of the most frequently used means. This reduces the business risk of the company. Companies working internationally are often faced with transaction risks.

Tang studied the exchange rate exposure of Chinese enterprises at the level of industry and enterprise. Chinese enterprises are expanding their business overseas, but because of lack of understanding of the risk of money, exchange rate risks are often ignored in practice. In order to manage exchange rate risk, this study suggests that Chinese enterprises should set up special committees to hedge against future cash flows, especially for non-financial companies (2015, p.605).Polodoo,Seetanah and Sannassee concluded that, as the result shows that much of Africa 's manufacturing industry is affected by exchange rate fluctuations. Exporters are facing risk aversion and African economies should seek help from developed and emerging countries in developing financial markets and hedging tools (2016, p.254). The study of Yazid and Muda shows that multinational corporations are involved in the management of foreign exchange risk mainly because they try to control the overall cash flow by the currency fluctuations. Another discovery of the role of foreign exchange risk management in Malaysia is most multinational companies focus on risk management activities, while more control networks have been applied for frequent reporting of derivative activities. As the foreign exchange market is still unstable, it is advisable for multinational corporations to actively