International business carries with it a number of risks for the organization. While many of these risks are difficult to mitigate, foreign exchange exposure, while a pervasive problem for international business, can be effectively dealt with through the process of hedging. Utilizing this as a basis for research, this investigation provides an overview of the specific issues and practices associated with foreign-exchange exposure. In addition, a review of hedging is considered. Synthesizing the research, it is concluded that hedging is a salient themes to reduce the risk faced by the organization when it comes to the issue of foreign-exchange exposure. This issue is important for both the student and the organization because it is a technique that must be learned in order for salient decision-making to take place in the context of the financial development of the international organization.
[...] Finally, researchers examining the definition of transaction exposure note that this process is one that focuses on how exchange rates impact the profits that are generated from individual activities in the organization. Belk and Glaum (1990) in their investigation of transaction exposure report that while some organizations use this specific aspect of the foreign exchange exposure to reduce the overall liabilities of the firm, in many cases transaction exposure is viewed in the same manner as translation exposure. While it is important for the organization to manage transaction exposure, it is, in and of itself, not the most significant predictor of the financial status of the organization. [...]
[...] Through a careful consideration of what has been written on this subject, it should be possible to provide a more integral understanding of how foreign- exchange exposure can have a positive or negative impact on the development of international business. Foreign Exchange Exposure—An Overview In order to begin this investigation, a review of what is meant by foreign- exchange exposure must first be considered. Balogh and Sultan (1997) in their examination of the specific risks encountered in the context of international business note that the issue of foreign-exchange exposure is directly related to the organization's sensitivity to changes in cash flows as a result of changes in the exchange rates of various countries. [...]
[...] Contracts are established between the organization and its foreign business partners to accept certain selling or buying terms based on negotiated rates that are often hedged in order to reduce the foreign exchange exposure risk of the organization. Although this practice is widely used by the international organization as a means to reduce financial risk, Moosa also notes that this process can also reduce benefits for the organization. According to this author: is arguable that risk minimization with no regard to the effect on expected return cannot be optimal. [...]
[...] Although transaction exposure can have a negative impact on the development of the organization, these researchers argue that the process can be effectively mitigated such that the overall foreign exchange exposure risk to the organization can be reduced. According to these authors, “Most authors suggest that companies should measure and hedge their transaction and economic exposure but not hedge their translation exposure unless debt covenants are in danger of being breached” (p. 59). When placed in this context, it becomes clear that the most notable threat to the organization when it comes for foreign exchange exposure is the issue of economic exposure. [...]
[...] However, when it comes to the issue of foreign exchange exposure, it is clear that this issue is one that, while having notable impacts on the financial health of the organization, must be carefully deliberated by the organization. Risk can easily turn into opportunity. As such, the organization must be able to effectively assess and integrate this information such that the best decisions for the success of the organization are made. References Balogh, C., & Sultan, J. (1997). Investing in foreign real estate: A [...]
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