Abstract
Companies that transact in different currencies face financial risk because of unpredictable exchange rate fluctuations. Exchange rate risk constitutes one of the most common forms of risk that firms in the international arena encounter and, in recent years, the management of this risk has become one of the key factors in overall financial management. Measuring and managing exchange rate risk exposure is important for reducing a firm’s vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. The main purpose of this paper is to show the role of derivatives in reducing exchange rate risk. This paper treats the nature of these financial instruments and shows how they can be used to manage foreign exchange risk or enter into speculative positions of currencies movements. DOI: 10.5901/ajis.2014.v3n2p371
Highlights
Today, the economic environment in which most firms operate is highly volatile and uncertain
Currency risk hedging strategies entail eliminating or reducing this risk, and require understanding of both the ways that the exchange rate risk could affect the operations of economic agents and techniques to deal with the consequent risk implications (Barton, Shenkir, and Walker, 2002)
The need for currency risk management started to arise after the break down of the Bretton Woods system and the end of the U.S dollar peg to gold in 1973 (Papaioannou, 2001)
Summary
The economic environment in which most firms operate is highly volatile and uncertain. One of the main factors effecting this process is the increasing market globalization and internationalization, which is reflected in increased exchange, interest, inflation rates fluctuations as well as in high competition, demand levels etc. Exchange rate risk management is an integral part in every firm’s decisions about foreign currency exposure (Allayannis, Ihrig, and Weston, 2001). Currency risk hedging strategies entail eliminating or reducing this risk, and require understanding of both the ways that the exchange rate risk could affect the operations of economic agents and techniques to deal with the consequent risk implications (Barton, Shenkir, and Walker, 2002). The need for currency risk management started to arise after the break down of the Bretton Woods system and the end of the U.S dollar peg to gold in 1973 (Papaioannou, 2001)
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
