Corporate Foreign Exchange Risk Management

Introduction

An exchange rate is the price of one country's currency in units of another currency. For example, on 12 August 2019, the USD/EUR exchange rate was 0.8927. This is the price of one US dollar expressed in terms of euros. It is the rate any treasurer or accountant dealing with these currencies would use to convert his or her cash flows (or assets) into units of the home currency on that day. They do so because a company operating internationally must be able to express its financial position in home currency terms.

This might give the impression that exchange rates are merely relative prices that are observed in the market and then applied in the everyday administration of a company. Nothing could be further from the truth. The exchange of foreign currencies is big business, and part of the agenda of world leaders and corporate management teams around the globe.

As this book is being written, the USA is embroiled in a rancorous trade war with China. While the grievances of US policymakers with China are many and varied, a key claim backing the hard line taken is that the Chinese government has been heavily manipulating the value of their currency (the renminbi). Such manipulation, the argument goes, keeps the value of the renminbi artificially low vis‐à‐vis the US dollar, creating an unfair advantage for Chinese exporters in the US market. Obviously, US firms also find it harder to make inroads into the Chinese market when the US dollar is strong. Considering the ...