Foreign Exchange Risk Essay Example | Topics and Well Written Essays - 1500 words - 1

Foreign Exchange Risk - Essay ExampleExporting and importing also implies considerable foreign stand in risks for the companies involved. Importers will have to pay a higher price if their home currency depreciates against the exporting foreign country and vice versa. International retailing trading operations also entail high exposure to foreign mass meeting risk as the exchange estimate of any of the two countries fluctuates. The fluctuations in exchange rate result in direct changes in the relative prices of municipal and foreign goods (Bartov and Bodnar, 1994, p. 1758) It ultimately increases the exposure of virtually all forms of transnational operations to foreign exchange risk.Foreign exchange or currency risk affects a caller in several different ways viz. gross revenue level, future specie flows, financial reporting, product price and production etc. Bartov and Bodnar propound that exchange rate fluctuations influence both the current and future expected change flow s of firms with international operations. (1994, p. 1758). Fluctuation in exchange rate can affect a companys future cash flows by increasing or decrease the price of goods and services in the domestic or foreign country. It can also affect a companys operational performance by increasing or decreasing the cost of importing raw material. Currency rates have a significant impact on the reporting of sales level. If the foreign exchange rates are favourable, the companys reported sales will rise (Bartov and Bodnar, 1994). Therefore, apart from affecting its real future cash flows, exchange rate fluctuations bear the capacity to influence its reported revenues.Exposure to foreign exchange risk can also affect a companys production level and its prices. It will be costlier for companies to import products from a foreign country having a high exchange rate as compared to the domestic