How do you plan a risk mitigation in a currency exchange rate?

1) example a company want to move its area of interest from USA to Europe

(please write 1 page)

2) example a company want to move its area of interest from USA to the rest of

the world. (please write 1 page)

Engaging in international business exposes businesses to risks because currency exchange

rates fluctuate often depending on the state of the economy, inflation rate and political stability

(Levich, 2001). The value of a currency increases when the economy is strong and stable.

Fluctuating exchange rates hurt the bottom line of many businesses. An American company

dealing in international trade may have to sell goods in different parts of the world. Mostly, the

transactions are settled first and the payments are transferred later. If the company sells some

equipment in Europe, it faces the risk of the fluctuation of Euros. If the payment is to be made

after around three to four months, the value of the Euro may drop within that period. When

converted to US dollars, it will be less than what the company expected to make when the

agreement was made.

The company can mitigate the risk through several strategies. The company can decide

to make business deals in US dollars instead of Euros. If the company receives its payments in

US dollars, fluctuations in the Euro will not affect its bottom line. The buyers from Europe will

bear the losses. The company can also use foreign exchange forwards to mitigate the risk

(Allayannis & Ofek, 2001). The two parties can set a particular exchange rate at which the

payment will be made at a later date regardless of the fluctuations in the market exchange rate.

The US Company can also buy currency futures contracts against the exchange rate. Futures

contracts also allow for the delivery of a foreign exchange currency at specified price and future

date (Brown, 2001).

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