Exchange Rate Risk is a Key Operational Risk Facing UK
Corporations during and after credit crunch
Exchange rates represent a price of one currency in terms of another (Gray and Irwin, 2003). Prior to Breton-Woods convention, most of the major currencies in the world were pegged to gold. Thus, the value of a given currency depended on the amount of gold contained in national vaults. At Breton-Woods, golden standard was abandoned and major currencies were pegged to the US dollar. Further economic growth and increase in business activities implied that more money supply was needed. Each country also realised the need for individual monetary policy to stabilise the economy. So, in the 1970’s Breton-Woods agreement was abandoned and major currencies started floating. Weaker currencies remained pegged to US dollar (Bordo and Eichengreen, 1993).
Floating exchange rates allowed more flexibility to the government in monetary policy. However, multinational corporations started facing a new type of market risk called exchange rate (or currency) risk. Profit of the companies does not only depend on its core business operations but also on the fluctuations of the currencies, in which transactions are made. If a company is due to pay for supplies in a foreign currency in a month and that currency appreciates, the costs will rapidly increase. In order to mitigate this type of risk, a variety of hedging strategies have been developed (Gray and Irwin, 2003).
Exchange rate risk can be mitigated either internally or with the use financial derivatives in the open market. Internal risk management measures imply that the risk can be avoided by using foreign borrowing from the country where a company has presence and holds assets. If the value of assets falls due to devaluation of the currency, the value of debt will also decrease. Another way to mitigate the currency risk is by implementing derivative instruments such as forward contracts, futures, currency options and currency swaps. Each of the hedging tools has its weak and strong sides (Hull, 1997).
Forwards and futures contracts give the right and obligation to the holder to buy a given amount of currency in the future at a preset exchange rate. This strategy can be useful if a company is due to pay a large amount in foreign currency in the future. The management has planned expenses in national currency, but the exchange rates may increase and the company will have to pay more than planned. Forwards and futures allow controlling this (Hull, 1997). However, exchange rates may change in a different direction and then the company will have to pay the preset amount even though the payment could have been lower if converted at the prevailing spot rate. Thus, futures and forwards do not always leave companies in a winning position but they are efficient in reducing uncertainty. On the other hand, options and currency swaps are the other popular hedging tools. Options, unlike forwards and futures, do not oblige companies to make a transaction at the preset price. The company can always withdraw. However, there is a fixed price that has to be paid for such as option. Currency swaps basically allow swapping debt obligations with another party. These hedging instruments have become essential for multinational companies since 1970’s when the currencies started to float (Brown, 1995).
The recent year of 2008 saw a rapid increase in volatility in all financial markets including the stock and foreign exchange markets. This increase in volatility and uncertainty can be expected to greatly impact multinational businesses. In such economic conditions it is essential to develop efficient risk management strategies that will include winning positions in foreign currency transactions. So, the scope and focus of the research is on recent hedging strategies used in financial and non-financial corporations in the UK before and during the crisis in financial markets. Since a number of companies declared losses during the adverse economic period and suffered negative effects from depreciation of the British pound, the problem of currency risk and hedging has become relevant and essential for investigation.
Prior to discussing the exchange rate risk and the role it plays for international companies, it would be reasonable to define the initial notion of exchange rate. Exchange rate is the base economic concept that is defined by Wessels (2000, p. 561) as “rate at which one currency is exchanged for another” (Wessels, 2000, p. 561). It can be generalised that the notion of exchange rate is defined similarly in the vast majority of other works in economics. For example, Hardwick et al (1999, p. 588) define the concept of rate of exchange as “the price of one currency in terms of another” (Hardwick et al, 1999, p. 588). In much the same way, Copeland (2005, p. agrees that exchange rate should be firstly understood as an inter-currency price.
Indeed, taking into account the fact that various currencies circulate in various countries, the problem of conversion foreign currency into domestic currency and vice versa proves to be very important for both participants of this exchange. For this purpose rates of exchange are determined by the foreign exchange market (Hardwick et al, 1999, p. 588). There is no country that can produce all the necessary goods and services by in-house facilities; thus, it turns out to be involved in export-import relations with international partners. The transactions between them are conducted relying on exchange rate and through foreign exchange market. The most frequently quoted international currencies are US Dollar (USD), Euro (EUR), British Pound (GBP) and Japanese Yen (JPY) (International Monetary Fund, 2002).
Certainly, the notion of exchange rate risk is closely connected with the concept of exchange rate and is defined as “exposure or uncertainty that is inherent in dealing with two or more currencies that do not have fixed-parity values” (Business Dictionary, 2009). It has been found out that exchange rate risk is often substituted in literature by the term “currency risk” (Kristof, 2008, p. 165). Borge (2001, p. 124) argues that currency risk can be understood as insecurity about the worth of foreign currency assets originated by changes in currency rates.
Exchange rate risk is often said to demonstrate the sensitivity of a certain company’s assets towards volatile dynamics of exchange rates. This sensitivity is revealed in the background of international transactions, where variations in the exchange rates bring the firm losses or gains. Usually the exchange rate risk embraces the temporal period between the contracting some transaction and the settlement of the payment. The possible risk implies the conditions in which the value of foreign currency with respect to domestic currency changes. Correspondingly, this situation may turn out to be favourable or unfavourable for a company, which explains the essence of risk. The situation of exchange rate risk may also be experienced by a corporation from other economic exposures, where international transactions are not necessary present (Irwin, 1997, p. 111; Pfeil, 1988, p. 21-44; Merna and Njiru, 2002, p. 198).
Gray and Irwin (2003, p. 2) have contributed greatly to the classification of the types of exchange rate risk in the corporate scale. The scholars subdivide exchange rate risk into two subcategories: project and financing related. A certain company experiences project exchange rate risk in the conditions when the outputs or inputs of a project are under the influence of exchange rate. Even if the outputs are sold inside the country, or domestically, and are not meant to be exported; and even if the inputs are of domestic origin too and have not been imported, they all have world price. Correspondingly, the cost counted in domestic currency will change following the exchange rate. For instance, the cost of fuel generates the exchange rate risk for any business that uses this resource (Gray and Irwin, 2003, p. 2).
The financing related exchange rate risk is experienced by a company because of direct financial operations with foreign currencies. Monetary relations of shareholders, taxpayers, customers, creditors and other participants of transactions in the global scale and the simultaneous changes in dynamics of exchange rate produce exchange rate risk for corporations (Gray and Irwin, 2003, p. 2).
It may be concluded that exchange rate risk or currency risk is rather important for international corporations to manage since this will determined losses or gains of the companies. International businesses are especially affected by exchange rate risk, for they conduct inter-currency transactions; however, even firms that work within one country face this risk indirectly. Thus, exchange rate risk is unavoidable for international businesses; and besides, it reflects the sensitivity of a given firm’s assets towards changing dynamics of exchange rates.
It has already been concluded that exchange rate risk provoked by the fluctuations of exchange rates may present serious financial difficulties for a multinational corporation. It would be reasonable to find out whether the factor of exchange rate risk can be managed and regulated on different levels or not. Gray and Irwin (2003, p. 2) suggest the following three measures that can contribute to managing exchange rate risk. Firstly, on the governmental level, rate of depreciation and the unsteadiness of the exchange rate can be cut down by means of maintaining inflation low and budgetary deficit small. Secondly, the sensitivity of a project’s value to the risk can be changed. For instance, the shareholders’ value sensitivity can be lessened by diminishing the dependence of the project on foreign currency debt. And thirdly, multinational corporations can themselves hedge exchange rate risk (Gray and Irwin, 2003, p. 2).
Thus, exchange rate risk can be managed and in a way controlled on different levels. Both governmental and corporate decisions can be applied to reduce the influence of this process. According to its aim, the dissertation is more interested in corporate hedging strategies that help companies to treat exchange rate risk.
Watson and Head (2006, p. 360) note that international companies tend to realise all the potential advantages of hedging or managing their exchange rate risk exposures more and more for recent years. For the most part the recognition of this necessity comes from enlargement of potential losses caused by adverse volatility of exchange rates. According to Brown (1995, p. 991), the popularity of hedging exchange rate risk has been increasing since the early 1970s, the moment when the Bretton Woods exchange rate regime came to collapse, and as a result of it, the leading international currencies had become less balanced with respect to each other.
Hardwick et al (1999, p. 589) define the notion of hedging as “the elimination of foreign exchange risk by matching foreign currency assets and liabilities” (Hardwick et al, 1999, p. 589).
At the same time, Sivakumar and Sarkar (2008, p. 5) argue that there exist several opinions on hedging of exchange rate risk. In other words, in spite of the possibility to manage this risk, not all the companies treat this problem similarly. Some multinational corporations consider hedging techniques to be highly speculative and do not practice them. There are even the companies that are unaware of the fact that they are under the influence of currency exchange risks. A lot of firms hedge only several of their risks, ignoring the impact of other risks. Smithson (1998, p. 251) singles out another set of firms considering that hedging of exchange rate risk cannot have any influence on shareholder value, because shareholders hedge themselves against risks by means of rational managing of their portfolio.
The question of hedging exchange rate risks has been also raised by McCarthy (2003, p. 9). In his discussion work the scholar studies the export-import relations between American, Australian, Singaporean and Japanese firms during period from 1992 to 2003. The companies’ strategies, application of hedging techniques are discussed in the work and besides, the fluctuations of the relevant currencies (USD, AUD, SGD and JPY) are also reflected. McCarthy (2003, p. 9) comes to the conclusion that in the majority of situations hedging is more preferable to not hedging. However, it is stated by the scholar that hedging for the short-term period was extremely significant, because those companies which rejected it, experienced financial problems. At the same time, there were cases when long-period hedging gave no benefit at all, but the risks were, nonetheless, secured.
Allayanis and Ofek (2001, pp. 273-296) apply multivariate analysis to study five hundred companies from the standpoint of managing of exchange rate risk. The scholars calculate the companies’ exchange rate exposure by means of the ratio of export sales to total sales. As a result of this research, statistical data prove the efficiency of the corporate exchange at risk management or hedging.
So, hedging can be recognised a stage of corporate exchange rate risk management process. The whole process is described to consist of the following phases: forecasting, risk estimation, benchmarking, hedging, stop loss and reviewing (Adler and Prasad, 1992, pp. 19-37). Even though the problem of hedging exchange rate risk is understood by various companies differently, statistical data and objective study in the sphere demonstrate that it is rather effective for mitigating financial risk that is associated with fluctuations of foreign currencies (Black, 1989, pp. 16-22).
At the stage of hedging, the exchange rates risk is managed by the choice of an appropriate hedging strategy that a company can apply in a given situation. There exist numerous financial instruments that can be practiced by a firm, such as forward contracts, futures contracts, currency options and currency swaps (Glen and Jorion, 1993, pp. 1865-1889; Hanoch and Levy, 1969, pp. 335-346).
There is considerable evidence from literature that FX risk management plays a vital role in financial management. Any company that produces or generates its revenue from foreign currency is viable for hedging currency risk. It can also be seen from many surveys that MNCs actively manage FX risk by a combination of hedging techniques both internal and external.
It is not only the hedging of FX risk but different kinds of FX risk requiring different treatment and techniques according to the importance considered by MNCs (Marshall, 2000). Different industries have different motives for hedging and apply different models and strategies to calculate risk (Aabo, 2001). Bodnar, Hayt, Marston and Smithson in 1998 show that FX exposure is of important concern to MNCs and many engage in management strategies to reduce risk. It has been found that majority of FX risk management is MNCs is an attempt to minimise losses (Rodriguez, 1981). Purpose behind their hedging activities can vary with these objectives (Marshall, 2000). Walt Disney Company in 2006 annual report disclosed their objective to manage FX exposure is to reduce volatility of earnings and cash flows in order for management to focus on principal business issues.
Pinpointing the risk your organisations faces is the biggest and most important priority. Once the risk has been identified it means half the job done. The company now has to decide the appropriate hedging tools which are a reflection of the MNCs FX policy. According to research arguments, operational hedges are more applicable for long term risk management, whereas financial instruments are effective for short term up to a period of 1 year (Chowdhry, 1996).
Analysts have found companies with hedging strategies are concerned by locking into forward contracts might jeopardise the advantage if currencies moved in their favour. The problem with forward deals is if the spot turns out to be favourable there is no way of changing the transaction. With options this all can be changed for a small percentage cost. This is where options come into play, providing the protection needed while retaining the benefits of favourable FX rate movement. (Hicks, 2000)
According to a survey on FX hedging practices carried out by city group has found companies focus upon short term hedging horizons which have no real effect. The survey also showed the attitudes of companies towards reducing currency risk. Almost 80 per cent of European companies that participated in the survey by Citigroup, hedge for more than a year compared with almost 70 per cent of US companies. Asian companies however, had the shortest term focus because of the wide interest rate differentials with the currency to be hedged. (Hugher, 27 jan 2006)
FX hedging normally is in headlines only when a company makes a big deal and it ends up in the wrong direction or when a number of companies provide the same answer to disappointing results. "Most companies’ hedge under one year in tenor but since hedging only postpones the impact of a currency move, the shorter the tenor, the more rapidly your performance will get hit by FX moves” (Hugher, 27 jan 2006, p. 43). Empirical studies have distinguished between types of hedging applied. Geczy, Minton and Schrand (1997) in their study examined the fortune 500 companies and found currency derivatives to be in direct correlation with research and development expenses, which is also supported by the study done by Froot, Scharfstein and Stein (1993). Tufano (1996) examined hedging behaviour within the gold mining industry and found commodity derivatives to be in negative correlation with the number of options and positive correlation with the stock held by the management. This behaviour of gold industry was similar to oil and gas industry as examined by Haushalter (2000) who found positive correlation between stocks held my managers and hedging. All these studies correspond to Allayannis & Ofek, 2000 findings that firms use currency derivatives to reduce FX exposure and not to speculate.
James Arnold, foreign exchange head at ICM, said: "Current market turmoil and the prospect of a global economic slowdown make it even more important that companies adopt formal foreign hedging strategies as margins tighten.” (Gribben, 2008, p. 12) Certain companies which operate in highly competitive industries tend to hedge risk in a more aggressive manner, which would intern generate incremental cash flows helping the company to price its products more competitively. (Hugher, 27 jan 2006) It can also be seen firms from similar industries react in similar manner in the stock markets due to movement of currency be it adverse or favourable. Hedged or non hedged does not make a difference the market assumes all companies to be unhedged even though the hedging policies are clearly stated in the financial reports of the firm.
By contrast MNCs, according to a survey by Arthur Andersen & Co, 65% hedge transaction exposure, and 68.1% expect to hedge in the next three years. It is visible from the results MNCs focus on transaction exposure to be more important than other FX exposure. As only 34.8% hedge economic exposure and only 24.5% hedge translation exposure (Perkins, 1993).
There is a number of a financial instrument or strategies that would allow multinational corporations to reduce or hedge exchange rate risks. Usually the strategies are subdivided according to their nature into internal and external (Ryan, 2006, p. 263). The internal means of hedging are the following. Firstly, a firm can lag (pay later) or lead (make the payment in advance) its payments in foreign currency relying on the forecasts about this currency (whether the currency rate goes up or down). The sense of hedging is very simple here: when a foreign currency depreciates, that means that the value of the domestic currency increases. Correspondingly, the volume of the payment will be lower. Thus, income and expenditures of a multinational corporation can be controlled by managing the timing of payments. Secondly, receipts and payments may be netted by a company. However, these internal strategies possess a certain limit of risk that can be hedged. That is why external strategies of exchange risk hedging are more frequently used and appear to be more effective, predicable and reliable (Ryan, 2006, p. 263; Ogilvie, 2009, p. 197).
A closer look can be taken at the external hedging strategies of forward contracts, futures contracts, currency options and currency swaps.
The notion of forward contract can be defined as an agreement to sell or buy a certain amount of currency at a specified rate on a previously appointed date in future. The period that can be embraced by a forward contract is usually limited to one year. Such forward agreements operate in all major international currencies and are usually recognised as the most popular hedging strategies practiced by multinational corporations (Fabozzi and Modigliani, 2003, p. 167).
As it may be seen from the main idea of this risk management strategy, the risk of depreciation of a foreign currency is hedged by means of contracting the purchasing the currency in advance. The following example can serve a good illustration of a forward contract. In June 2009 Microsoft Inc. signed a forward contract for €12 million for three months and turned to the leading global financial service JP Morgan Chase for the quote on the relevant currency. At that period of time the spot rate for Euros was equal to $0.925. However, after the three months according to JP Morgan Chase the exchange rate was $0.920. Thus, Microsoft was rather pleased to lock the currency at the rate of $0.925, this way, having hedged the exchange rate risk using the strategy of forward contract (Financial News, 2009).
Watson and Head (2006, p. 368-370) state that there exist two main types of forward contract. The first type, forward rate agreements (FRAs) “enable companies to fix, in advance, either a future borrowing rate or a future deposit rate, based on a nominal principal amount, for a given period” (Watson and Head, 2006, p. 368). FRAs possess a very interesting feature: the contracts themselves can be called binding, however, the company is not obliged to the provider of FRA to take out a loan with it only. The second type, forward exchange contracts (FECs) “enable companies to fix, in advance, future exchange rates on an agreed quantity of foreign currency for delivery or purchase on an agreed date” (Watson and Head, 2006, p. 369).
The principal advantage of forward contracts is that they can be adjusted to the concrete requirements and needs of a multinational corporation. Resting upon reliable forecasts, a company can secure itself against unfavourable fluctuations of currency rates, freezing the exchange rate for a certain period of time. But on the other hand these contracts cannot be characterised as marketable and cannot be sold to the third party (Watson and Head, 2006, p. 369). Wilson and Heitger (2002, pp. 33-38) argue that even though a company is protected from negative exchange rate changes, it is also bound by a forward contract and does not have the opportunity to react on favourable exchange rate movements. It cannot be flexible in spontaneous extracting of profit resulted by exchange rate.
The notion of futures contract is defined by Brentani (2004, p. 89) as “an agreement in the form of a standardised contract between two counterparties to exchange an asset at a fixed price and date in the future” (Brentani, 2004, p. 89). The asset of the contract may appear to be a certain product or a financial security (further delivery of goods is not implied here).
According to the principle of its operating, futures contracts resemble greatly the previously described forward contracts. However, the distinguishing characteristic of futures contracts is that they are standardised by the frameworks of size, period and quality (Pike and Neal, 2006, pp. 333-334). In addition, Sivakumar and Sarkar (2008, p. 5) argue that futures are more liquid, because they are traded through the ordered and structured system of exchange, futures markets. This is the London International Financial Futures and Options Exchange (LIFFE) in the United Kingdom. Thus, the mechanism of hedging currency risks can be presented by means of the following pattern: appreciation of a certain currency may be hedged by purchasing futures, and vice versa, depreciation of a certain currency is hedged by selling futures (Sivakumar and Sarkar, 2008, p. 5; Smart and Magginson, 2008, pp. 540-541).
The following example may serve a good illustration of corporate exchange rate risk management where the strategy of futures contracts is used. A multinational US corporation plans to enter into export relations with a Norwegian firm. In order to prevent possible financial risks associated with the Norwegian Kroner (NK) to the Unites States Dollar (USD) fluctuations, the management of the firm decides to hedge these risks by means of futures contract on the dollar to the euro exchange rate. With respect to the dollar, the Norwegian Kroner will behave in a similar way (Jorion, 2007, p. 294). Thus, the probable risks can be hedged.
Sivakumar and Sarkar (2008, p. 5) underline the following advantages of the futures contract strategy. Firstly, practicing this strategy, multinational corporations do not experience the problem of double coincidence because of the standardisation and the common market for futures. In the case of futures a relatively small initial outlay is required; however, in return an international company may not only manage risks, but also receive considerable gains after fluctuations of exchange rates. This opportunity can serve a very good leverage for companies that will help to strengthen their financial positions (Sivakumar and Sarkar, 2008, p. 5). At the same time, futures contracts are not so flexible as forwards; their feature of tailorability is considerably limited by the previously discussed standards. Sivakumar and Sarkar (2008, p. 5) argue that this characteristic makes this strategy inappropriate for certain companies (instead of required amounts only set denominations of money can be bought).
Sivakumar and Sarkar (2008, p. 5) define the notion of currency option as “the contract giving the right, not the obligation, to buy or sell a specific quantity of one foreign currency in exchange for another at a fixed price; called the Exercise Price or Strike Price” (Sivakumar and Sarkar, 2008, p. 5). The fact that the strike price is stable and unchangeable secures a company from unfavourable movements of exchange rate; correspondingly, the possible risk of losses can be reduced. The strategy of currency options is especially vital for the corporate risk management with respect to contingent cash flows.
The corporation uses call options in the situation when the risk is expressed in the upward tendency of price; and it uses put options when the risk is expressed in the downward price tendency (Sivakumar and Sarkar, 2008, p. 5). The right to purchase the determined amount of currency at the strike price is given to the holder company by call options; put options provide the right to sell the currency at the strike price (Fabozzi, 1998, pp. 87-88).
Smart and Magginson (2008, p. 550) emphasise that the principal advantage of the currency options strategy is that by means of it a liquid secondary market is created. The company may sell its options whenever it makes a decision to do it, it does not have to hold them up to the date of expiration. However, certain disadvantages of the discussed strategy also exist. Fabozzi (1998, pp. 87-88) argues that “options traded on formal exchanges must be purchased in fixed face values and lot sizes” (Fabozzi, 1998, pp. 87-88). Options with various notional amounts can be offered by some banks, but this way, sold not in the open market these options will be more expensive for companies. Secondly, the scholar states that the potential cost emerging from the difference between the fixed option amounts and the amount to hedge is to be born by a multinational corporation (Fabozzi, 1998, pp. 87-88).
Under the term swap Sivakumar and Sarkar (2008, p. 5) understand “a foreign currency contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the spot rate” (Sivakumar and Sarkar, 2008, p. 5). Smart and Magginson (2008, p. 553) define the currency swap as “the contract in which two parties exchange payment obligations denominated in different currencies” (Smart and Magginson , 2008, p. 553).
The following example can serve a good illustration for practicing the strategy of currency swaps with the aim to manage exchange rate risk for an international corporation. An American multinational company tends to make an investment into a German firm. It would be more rational for this company to make the investment in local currency – euros. There definitely exists a German international corporation wishing to invest into the United States, which also choose dollars for this investment. These two companies can fix swap currencies and set up the appropriate exchange rate (Smart and Magginson , 2008, p. 553).
One of the main advantages of currency swaps is that besides managing the risk of exchange rate movements, this strategy gives the multinational corporations the opportunity to hedge risks associated with interest rates. The strategy provides companies rather protected position against exchange rate fluctuations, allowing to exploit the world markets more effectively (Hull, 1997).
the previously discussed exchange rate risk hedging strategies have certain strengths and weaknesses. One of them may appear more beneficial and advantageous in some situation; and may look absolutely useless in another. However, in order to evaluate the effectiveness and positive features of the strategies objectively, previous works and opinions of various scholars should be analysed and taken into account.
El-Masry (2006, pp. 137-159) has conducted a grounded research in the sphere of risk management practices of non-financial organisations in the UK. His research was organised in the form of a questionnaire survey that was focused on identifying specific reasons for applying or not applying derivatives in 401 non-financial organisations in the UK. Moreover the way, how the derivatives were used has been investigated.
El-Masry (2006, pp. 137-159) has come to the conclusion that larger companies use derivatives more often than medium and small firms; public companies apply derivatives more often than private ones. But the usage of derivatives is the greatest among the international corporations. The findings of the research has demonstrated that there is a certain number of firms which do not apply derivative instruments at all, because their exposures are not significant, or the potential costs for applying these instruments are higher than the potential benefit. The most commonly managed with derivatives corporate risk is exchange rate risk (El-Masry, 2006, pp. 137-159).
El-Masry (2006, pp. 137-159) also gives the review of the most commonly practiced strategies aimed to hedge exchange rate risk. The most popular instrument for the British non-financial companies is the currency options strategy (Hull, 1997). It is followed by forward contracts and futures contracts. The least frequently used strategy is currency swaps.
Another scholar who has done significant investigations in the field is Joseph (2000, pp.161-184). The scholar has examined the relationship between the key characteristic features of British multinational enterprises and the hedging techniques that had been practiced in them. The findings demonstrate that the vast majority of these enterprises hedge their foreign exchange exposures. The strategies of hedging exchange rate risks belong to the subcategory of external techniques; internal derivatives were used very seldom (Joseph, 2000, pp.161-184).
Dhanani (2003, pp. 35-63) conducts a very detailed and deep case study of the largest UK multinational corporation that operates in the mining industry. The whole exchange rate risk management process is analysed by the scholar. Dhanani (2003, pp. 35-63) comes to the conclusion that corporate reconsideration of the risk hedging process can bring positive changes and certain benefits.
It may be concluded, that the majority of the researches in the field consider currency options a very effective strategic tool that can provide very useful leverage to a company’ profits in case it picks a winning trade. Currency swaps, thought this strategy was the least frequently used among the UK non-financial organisations, serve an effective stimulus for winning international markets and expanding business relations in the global scale (El-Masry, 2006, pp. 137-159). By means of forward contracts a multinational corporation can be protected from unexpected fluctuations of exchange rates. Besides, the exact value of the import or export deal can be calculated immediately, not being affected be further currency movements. However, practicing the forward contract strategy a firm becomes bound and will not be able to make use of favourable changes in exchange rate. Futures are highly liquid, but at the same time they remain one of the most risky investments (Forex Relationship Centre, 2009).
Please Not the above stated research content are extracted from journal, books and Wikipedia
References
Adams, G., Schvaneveldt, J., 1991. Understanding Research Methods. 2nd Edition, Longman, New York
Adler, M., Prasad, B., 1992. On universal currency hedges. Journal of Financial and Quantitative Analysis, Vol. 27, pp.19-37.
Allayannis, G., Ofek, E., 2001. Exchange rate exposure, hedging, and the use of foreign currency derivatives, Journal of International Money and Finance, Vol. 20, pp. 273–296
Baker, M.J., 2001. Marketing: Critical Perspectives on Business and Management. Taylor & Francis, p. 658
Barclays, 2009. Annual Reports [online] Available from: www.barclaysannualreport.com/
Black, F., 1989. Universal hedging: optimizing currency risk and reward in international equity portfolios. Financial Analysts Journal, Vol. 8, pp.16-22.
Bordo, M. and Eichengreen, B., 1993. A Retrospective on the Bretton Woods system: lessons for international monetary reform, Chicago: University of Chicago Press
Borge, D., 2001. The book of risk. Investment Series. The Smart Guides Series. John Wiley and Sons, p. 124
BP, 2009. Annual Reports [online] Available from: http://www.bp.com/extendedsectiongenericarticle.do?categoryId=9021605&contentId=7040949
Brentani, C., 2004. Portfolio management in practice. Essential capital markets. Corporate finance essentials. Butterworth-Heinemann, p. 89
Brown, W.S., 1995. Principles of economics. Pennsylvania State University, p. 991
Business Dictionary, 2009. Exchange Rate Risk Definition. [online] Available from:
Collis, J., Hussey, R., 2003. Business Research: A Practical Guide for Undergraduate and Postgraduate Students. Basingstoke, Palgrave Macmillan, p. 146
Copeland, L.S., 2005. Exchange rates and international finance. Pearson Education, Edition 4, p. 3
