The Risk of doing Business Abroad
Risk of doing Business Abroad
How can a company eliminate the risk of foreign exchange rate while doing business overseas? Simple do not do business overseas.
* Economic Exposure: When changes occur in rates, operating costs will make a product uncompetitive in the global market. Profits will be diminished. There is very little that a company can do about economic risk.
* Translation Exposure: Currency exchange rates will reduce a company’s earnings and it will weaken the balance sheet. It can be argued that currency fluctuations have no significant impact on real assets.
* Currency Exposure: this is caused by a negative move in a currency between the time when a contract is agreed and the time it is completed. ("Exchange rate risk," )
If the exchange rate of EUR/USD was 1.2868 in 30 days, what would ...view middle of the document...
2868 and multiplying that by the $100,000.00. This is an example of economic exposure due to the fact that 30 days ago the amount was $138,680.00 and now it is $128,680.00 this is a difference of $10,000.00. This is not a translation exposure; the company is not losing below the original $100,000.00.
What would be the impact on the firm if the exchange rate was EUR/USD 1.4868 in 30 days? Discuss in relation to the three currency exposures in 2. Include calculations.
This would be best case scenario; the company billed at $100,000.00 to $138,680.00 and at the end of the 30 days the company will now receive $ 148,680.00 that is an increase of $10,000.00 however if you look at the original amount of $100,000.00 it is an increase of $48,686.00.
Translation exposure can be limited by using several techniques such as currency hedging. This is diversifying currency holdings and monitoring exchange rates. Transaction exposure can be helped by a process known as factoring. Many large corporations will transfer their accounts payables to a factoring house. This house will take the receivables, admin services and any other services that may be needed.
How could DGP Inc. eliminate or reduce these exposure risks? Provide two hypothetical examples to support your answer.
One method is to deal only in a US currency. Billed in USD and receive payments in only USD. This is going to put the exchange issue on the shoulders of the customers which may result in the loss of those customers. Another method is to not do business overseas. This will also limit the customer base.
The most logical approach is to understand exchange rate risks. Having a team of financial advisors is a good idea.
Exchange rate risk. (n.d.). Retrieved from http://www.qfinance.com/financial-risk-management-calculations/exchange-rate-risk
Smart & simple money transfers. (n.d.). Retrieved from http://www.usforex.com/currency-converter/?cid=892&kid=5344&mkwid=svxcoZHmW&pdv=c&pcrid=39627648208&gclid=