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Essay / Research Paper Abstract
This 3 page paper identifies 3 risk that are faced by companies undertaking international financial transactions; exchange rate risk, interest rate risk and possible changes in taxation rates. Each risk is explained and potential mitigating strategies are discussed. The bibliography cites 3 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TEriskinter.rtf
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Unformatted sample text from the term paper:
minimise risk. The first and most obvious risk is that of exchange rate volatility. Where international transaction take place there is the impact of exchange rates, these may move
in favour of a firm or against them and may turn a profit into a loss. There are many influences in exchange rates, all of which are interdependent and impact
on the value. There are a number of tools or approaches the firm may use to mitigate or reduce the risk. The
only way of mitigating the risk in full is to undertake contracts in their home currency, where the risk is transferred to the other party in the contract. However, even
this has risks, there is the risk of losing the contract and the costs to the other party resulting from the risk may also present risks to the completion of
the contract. This is not usually a viable strategy for use in all international transactions (Howells and Bain, 2007). The firm may seek to manage the timing of payments,
making payments when they feel that the exchange rate is advantageous to the, this may mean making some payments in advance. However, one of the most useful tools may be
the use of hedging with the use of options. An option is a derivative contract; it is bought and gives the buyer the right to purchase a set amount of
a commodity at a set price at a set point in time. This has a cost to purchase the contract, and the commodity will be the currency that is
needed for the contract, or may be the home currency which will be bought with the proceeds coming from the completed contract if it is a sale transcaion (Stephens 2000).
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