International Financial Managementsunyu Essay Example | Topics and Well Written Essays - 2000 words

International Financial Managementsunyu - Essay Example These techniques are ideal for an exporter who wishes to have stable cash flows subject to foreign exchange risk. It is concluded that multinational businesses and investors that engage in import or export of products and services or those that make foreign investments across the global economy should be aware of the risk exposures and the most appropriate hedging strategy for each type of risk. It is also suggested that special attention be given to economic exposure because it substantially impact the firm’s market value and expected future cash flows and even affects the competitive position of a firm that does not sell or operate overseas. By examining a range of academic materials, recently published book, magazine articles, journal articles and internet sites on the topic this report identifies the nature of the exchange rate risk faced by an exporter then describe the market strategies available for hedging the risk. Foreign exchange exposure comes about if an investor or a firm has an open position (un-hedged condition subject to exchange rate risk) in a foreign currency. There are two types of open position, open long and open short position (Homaifar, 2004). Open long position is one where a firm expects to receive foreign currency in future while open short position is one where the investor needs to pay foreign currency in future (Siddaiah, 2009). Foreign exchange risk therefore refers to the possibility or likelihood that a foreign currency may move in a direction that is detrimental to the investor. Specific risk in open log position is that the foreign currency may weaken against the domestic currency thereby decreasing the local currency equivalent (Poitras, 2002). On the other hand, specific risk in open short position is that the foreign currency may strengthen against the domestic currency thereby increasing the domestic currency equivalent