Currency hedging Essay -- essays research papers

What is hedgerow? Hedging is a strategy used to protect stakes posed by worldwide currency fluctuations. One hedges the currency luck by contracting to sell foreign currency in the future, at the current transfer rate (Fries). If fund managers think the dollar is going to be stronger when they are ready to change the foreign currency back into American dollars, then they take out a foreign futures contract (a hedge). Thus, they lock in the veer rate beforehand, so that they will not lose profits gained from holding devalued foreign currency (Hedging, 1999). If the manager guesses correctly, he will lift the funds overall return because the profits will be worth even more when they are commuted into American dollars.The foreign exchange market is one of the most important financial markets. It influences the relative price of goods between countries and can shape trade. It influences the price of imports and can have an effect on a countrys price level (inflation rate). In addi tion, it influences the international investment and financing decisions. commutation rates present many risks to a association and a company must be able to hedge itself (Gray, 2003). The price of one currency expressed in terms of another currency is called an exchange rate (Gray, 2003). Foreign investors need to sell in a foreign currency to be competitive. By making the most of the exchange rate risk, it may take away some of the risk of the cross border trade from customers. This in turn may encourage a customer to buy products.central rates are the amount of one countrys currency needed to purchase one unit of another currency (Gray, 2003). Typically, vacationers wanting to exchange money will not be bothered with shifts in the exchange rates. However, for multinational companies, dealing with very large amounts of money in their transactions, the rise or fall of a currency can mean receiving a surplus or a deficit on their balance sheets, which is an example of translation risk. explanation risk is more of an accounting issue, and refers primarily to the impact of exchange rates on earnings and balance sheet items (Hedging, 1999).Another type of exchange risk faced by multinational companies is transaction risk. If a company sells products to an overseas customer, it might be subject to transaction risk. Transaction risk refers to actual conversions of gold flows from one c... ...to the American dollar will affect the total loss or gain on the investment when the money is converted back. This risk usually affects businesses, but it can also affect individual investors who make international investments, also called currency risk (Investorworld).Referenceshttp//www.investorwords.com/1808/exchange_rate_risk.html retrieved February27, 2005Fries, Bill. Thornburg Articles. Currency Hedging retrieved February 24, 2005 fromhttp//www.thornburginvestments.com/research/articles/Currency%20Hedging.aspGray, Phil and Irwin, Tim. (2003). Allocating Exchange Ra te Risk in PrivateInfrastructure Contracts retrieved February 24, 2005 fromhttp//rru.worldbank.org/Discussions/Topics/Topic21.aspxHedging Currency Risk with Options and Futures retrieved February 25, 2005 fromhttp//www.goldencapital.com/research/reports/hedging.htmKaepplinger, Peter (1990). The CPA Journal Online Foreign currency hedging transactions under Section 988Temporary regulations Retrieved February 24, 2005 from http//www.nysscpa.org/cpajournal/old/08660556.htm