International Financial Management

Assignment: Exchange Rate Risk Management

As the world of business becomes increasingly global, multinational corporations (MNCs) are establishing the production and marketing operations in foreign countries. These MNCs face a variety of challenges. One of challenge faced by MNCs in foreign markets is fluctuations in currency exchange rates. Movements in exchange rates can cause instability in profit margins and significant losses to an MNC’s bottom line. Thus, exchange rate risk management is an integral part in MNC’s decisions about foreign currency exposure. Measuring and managing exchange rate risk exposure are important functions in reducing a MNC’s vulnerabilities from major exchange rate movements. In order to manage currency exchange rate risks, MNC often use financial instruments or currency derivatives.

Required:
1. What are the types of exchange rate risks faced by the MNCs?
2. Understand the attempt for the use of foreign exchange derivatives (exchange rate risk management approaches) that can benefits the MNCs.

Assignment required student to demonstrate professional skills in research, presentation and communication with full references and an appropriate bibliography. * Assignment should be completed using a word processor and should be no more than 10 pages, using Arial 12, single spaced. * Submission should be a single word document. * This is an independent assessment, and it is unlikely that students will provide identical comments.

Question 1

MNCs, Multinational Corporation, a corporation that has its facilities and other assets in at least one country other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. Very large multinationals have budgets that