Currency Hedging

Currency Hedging

Luis Figueroa

University of Phoenix

MGT-448 - Global Business Strategy

Leslie Syring

February 5, 2006

Currency Hedging

When a company decides to expand into the global business arena it will have to deal with many new issues that would not have affected them otherwise. The exchange rate is a very important factor in international business that must be continually monitored. Any changes in the exchange rate can significantly impact how a global organization operates. There are ways a company can protect itself from these risks, forward exchange rates and currency swaps (Hill, 2002). As business continuously expands into the global arena more organizations are finding it necessary to pay close attention to foreign exchange market. These companies must follow the foreign exchange market closely and should develop appropriate hedging strategies to protect themselves. Exchange rate risk is the unexpected exchange rate that may cause an organization to lose or gain income. Currency hedging is a method of minimizing the financial and exchange rate risk for an international organization. Companies involved in global operations should have a good understanding of the financial risks its company will face prior to starting its venture (http://www.finpipe.com/hedge.htm).

Currency Swaps

According to our text, "a currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates (Hill, 2002). Here is an example of a currency swap. The organization I work for purchases some of the components of its video units from Germany; it later sells completed video systems in Germany. In order to pay for the supplies, the company has to purchase a sizable amount of Euros. However after a short period the company will receive Euros from the import company which can then be converted to dollars for use in the U.S.

Advantages and Disadvantages of Currency Hedging

Some companies hedge to become or remain competitive. These companies are trying to stay ahead of their competitors that may be located in other countries and that produce similar products which they sale globally.

When a company is able to reduce the amount of foreign exchange risks, it can increase its bottom line by positioning the company so that it is not affected negatively by the change in currency rates. One can not predict the currency rate movement. It is something that changes from day to day. When a company decides to cash its foreign currency into dollars at the right time,