recent swing in international currencies

Exchange rate risk has increased as a result of the recent fluctuations in world currencies. As much as organizations concentrate on exchange rates or nominal rates, what matters is how currency changes are modified in light of inflation. Many multinational corporations simply control outwardly evident risks, such as exposure to substantial transactions in emerging nations. Transaction, portfolio, and transaction risk are common currency risks that multinational corporations encounter. These risks can be hedged using financial products like swaps and currency features (Goedhart, Tim & Werner, 1). These approaches do not, however, cover all currency risks. This paper presents how international companies hedge currency risk. A Dutch food retailer with branches in the Netherlands and US faces portfolio risk. Based on the nature of its operations, supply chain, income and expenses for its branches are set in local currencies. However, the organization is certainly exposed to portfolio risk as cash flow from the branch in the US can change with the exchange rate when it is converted to euros for performance management and financial disclosure purposes. Again, portfolio risk cannot result in economic distress and hence not a risk that the company should actively hedge. Like the Dutch food retailer, Unilever experiences currency risk such as portfolio risk. Nonetheless, being consumer-goods firm, shareholders can hedge exposure portfolio risk using positions. Unlike, Unilever, A Germany firm that exports beer to the US faces not only structural but also portfolio risk. Owing to the fact that the Germany Company generates incomes in US dollar but incurs expenses in euros, it is a threat if structural and portfolio risks. This can considerably affect its net cash flow from American operations while triggering financial distress, particularly, when the profit margin is thin. Any drop in the dollar would adversely affect US operations. Inflation in Germany and United States can make prices similar in both countries; however, it might take a number of years (Goedhart, Tim & Werner, 3). Since the company is rooted in the discrepancy in cash flow, financial instruments cannot be suitable for the Germany brewing firm to manage the currency risks. Financial risk is also not suitable for the Germany brewing company due to the size and exposure duration, this can involve hedging dollar-denominated income for its future operations(Du & Jesse, 30). As a result, the effective measure to hedge its currency risk, the Germany brewer firm should reduce the underlying mismatch of the cash flow. In other words, the Germany brewer can manage the currency risk by selling the beer at a premium cost in the United States, an aspect that addresses the issues of mismatch in the cash flow. Similarly, automobile markers in Germany and Japan with operations in the US manage their currency risk by decreasing structural exposure to the dollar. Nevertheless, this is a natural hedging approach that can only be effective if the expenses are not significantly high and do not compromise the company’s competitiveness. Global companies also face currency risk in form of transaction threats. For instance, a Chinese firm that produces products and sells in the United States is exposed to transaction risk as the payment may be delayed for days or weeks. However, transaction risk is short-term and less likely to put an organization in a financial distress apart from extreme conditions such as when it acquires considerable sales or purchases in a foreign currency (Goedhart, Tim & Werner, 6). International firms have to put in place hedging measures to address transaction risks from foreign activities. By and large, international organizations are vulnerable to currency risks; however, some of them are extremely risky. For that reason, management should take a holistic perspective to highlight the impacts on the cash flow and not profits.



























Works cited

Du, Wenxin, and Jesse Schreger. "Sovereign risk, currency risk, and corporate balance sheets." (2016).

Goedhart, Marc, Tim Koller, and Werner Rehm. "Getting a better handle on currency risk." McKinsey Co. Julio. Pp (2015): 1-7.