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Essay / Research Paper Abstract
Companies face a range of financial risks; these can include exchange rate fluctuations and changes in interest rates. This 5 page paper looks at the way a firm may reduce their exposure to these risks. Strategies considered include the use of long and short hedging and the use of currency and interest rate swaps. The bibliography cites 4 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TEriskint.rtf
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Unformatted sample text from the term paper:
rates and exchange rate fluctuations that the firms cannot control, they can only react to these influences or seek to mitigate with proactive strategies, trying to deal with the consequences
of the events and influences. When looking at influences such as exchange rate fluctuations and changes in interest rates there are measures that can be adopted that will help
to mitigate the impact of these risks. There are a range of approaches. One approach is to manage the agreements and contracts which are made, however, this may have only
a limited benefit and may also have associated costs (Howells and Bain, 2004). For example, loans/debt may be taken out on fixed rates, rather than variable rates which will reduce
the potential direct impact of interest rate changes. However, this may not be available, it will also carry a risk, as where fixed rates are granted they will usually be
more than the expected floating rate and if interest rates go down further the fixed rate will have a high opportunity cost (Nellis and Parker, 2000).
To help alleviate the issue of exchange rate fluctuations there may be the use of contracts set in the home currency, but this may also have
a cost, as it may limit customers, as it does not mitigate the total risk, it is shifting it so that the other party to the contract carries the risk.
Other business approaches include diversification across different economies, this may include doing business in different currency areas, or taking out debt in different areas, but this can also aggravate
a disadvantageous change as there is then exposure to both currency and interest rate changes (Stephens, 2000). The way that exposure may be mitigated, or reduced is through the
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