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A study on currency correlation and variability as a hedging tool: An analytical study of their relationship

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  1. Introduction
  2. Background of the study
  3. Statemant of the problem
  4. Needs and importance of the study
  5. Objective of the research
  6. Methodoilogy
    1. Types of currency exposure
    2. Management of foreign exchange exposure
    3. World monetary system
    4. Factors determining the exchange rates
  7. Research design
    1. Type of research
    2. Sampling techinique
    3. Sample size
    4. Sample description
    5. Actual data collection
    6. Software used for data anaysis
  8. Presentation of data
  9. Conclusion
  10. Finding and suggestion
  11. Scope for further research
  12. Bibliography

Organizations are becoming increasingly more globalized. Currency transactions and risks there upon influence an organization portfolio. Firms are finding it necessary to pay special attention to foreign exchange exposure and accordingly design and implement suitable hedging strategies. The Foreign Exchange management decisions are affected by the level of risk that a given currency environment creates. MNCs need greater sophistication in managing currencies that revalue quite often. Two mechanisms, which are useful and generally used by MNCs in covering their transaction exposure, are prediction of currency volatilities over time and finding out correlation between currencies in which they are dealing. The present focuses on these mechanisms for hedging transaction exposure using simple correlation and covariance analysis. Here in this dissertation, it presents the reasoning and empirical evidence behind currency volatility and correlation over the period of time.

Basically this chapter deals with the background of the study or genesis of the problem to be studies and the statement of the problem to be analyzed in this dissertation. Similarly, it also covers the need and importance of this study and the main objective.

The globalization of financial markets brought about by recent technological changes, financial market liberalization and the removal of capital controls have impressed upon all MNC with international cash flows the necessity to manage foreign exchange exposure that a floating exchange system creates. Today multinational firms are trying to develop techniques and strategies for effective foreign exchange exposure management. The foreign exchange strategy adopted is critical to a MNC in the present day environment due to the high variability in the exchange rates and need to evolve with the changing structure of the company.

[...] Exploratory research is a study undertaken to define nature of problem and opportunity and to gain a better understanding of the environment within which the problem and opportunity has occurred. The objective of exploratory research is to develop hypothesis rather than testing SAMPLING TECHINIQUE Among the various types of sampling technique, simple random sampling technique has been adopted in this dissertation. A simple random sampling selects the samples by methods that allow each possible sample to have an equal probability of being picked up and each item in the entire population to have an equal chance of being included in the sample. [...]

[...] Translation exposure: The effect of an exchange rate changes on published financial statement of a firm is known a translation exposure. Economic exposure: The degree to which firm's value of future cash flows can be influenced by exchange rate fluctuation is known as economic exposure. Of these, the first and the third together are sometimes called ?cash flow exposure? while the second is referred to as ?accounting exposure? or ?balance sheet exposure?. The reasons for this will become clear below. [...]

[...] Although a MNC may not be able to predict a currency's future variability with perfect accuracy, it can identify currencies like the British Pound whose values are most likely to remain stable vis-à-vis highly variable currency like South African Rand in the near future FINDING AND SUGGESTION Following suggestions can be drawn from this dissertation: It is advisable for the MNCs to have their transactional exposure with the currencies, which shows very strong and positive correlation with the home currency so that any gain and loss can be offset as natural hedge on appreciation or depreciation of the currency in the future. [...]

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