This report addresses a number of complex issues related to foreign exchange risk management. The report begins by defining the term ‘foreign exchange risk’ in an attempt to dispel the confusion surrounding this term and other types of risks, such as political risk, country risk and currency risk, to name but a few.
Having identified the risk that the general term ‘foreign exchange risk’ embodies, a number of measures are introduced enabling one to determine ‘what’ is at risk. Such measures include transactions, translation, and economic exposures. Also, methods of measuring exposure by country or currency are introduced.
Identifying what is at risk and how much risk, are the first steps to securing the firms overall position in the volatile exchange rate environment. Once this has been done, strategies can be designed to reduce the risk and/or the exposure. In this regard, hedging strategies play a crucial part in the survival of the international firm. Techniques, to reduce short -term, long -term and economic exposure are reviewed.
As part of any attempt to manage a foreign exchange exposure, understanding how exchange rates behave is of considerable importance. There are various types of forecasting models, however, those belonging to the category of technical analysis, provide the forecaster with buy and sell signals which can lead to profitable trading.
It is demonstrated that a combination of volatile exchange rates and institutional impediments which act to limit the trading of some of the major players, creates an environment in the foreign exchange market in which technical forecasts can lead to profitable trading. Finally, the report examines the accounting and taxation framework adopted in Australia.