Managing foreign exchange risk Essay Example | Topics and Well Written Essays - 1750 words

Managing foreign exchange risk - Essay Example This sort of currency disparity amongst the loans of the financial organizations and the assets by which the organizations are funded result in a huge risk where, if at all, the local currency of the nation in which the organization functions reduces against the U.S. Dollar, then the finance organization will be burdened with a substantially huge obligation of liabilities. This paper delineates the efficacious management of Foreign Exchange Risks with regards to hedging. Moreover, we would be able to seek a practical and a prolonging solution to it by applying an affiliation between the private sector and the benevolent communes to quintessentially conquer a chief hurdle which presently holds back the private sector from facilitating risk management assistances to the financial organizations. ... For many years, the South African Development Community has been subjected to poor grain harvests, when the government of both the countries tended to import grains at high prices. Concurrently, the foreign exchange of South Africa witnessed a gradual increment in the trading values of its cereals raising a positive flag for the likelihood of hedging regional import prerequisites (Dana et al, 2006). The hedging of imports can easily be accomplished by means of future contracts and associated financial options. The buying of elongated positions resolves the consequent SAFEX amount basis which construes to the fact that hedging, by bringing into use these instruments alone in unable to defend against the transformations in transport costs and economic costs for the reason that all of them may tend to vacillate widely. This results in a significant element of risk. As a result, the hedging schemes and replication results delineate that hedging by means of various futures or options may appear to increase the import costs with time passing by, which results in reduced inconsistency and likely producing lower standard prices. These advantages augment only if hedging is brought into implementation when domestic prices are at less than the import equivalence and also, if at all the hedge is powered. Nevertheless, there are chances for problems to stay as intra-regional transport prices stay elevated (Dana et al, 2006). A