International Business: The New Realities, 5th Edition

Managing Currency Risk

1. 10.5 Explain how to manage currency risk.

Shifting currency values are among the biggest day-to-day challenges facing international firms, like Markel in the chapter’s opening case. Foreign direct investors face currency risk because they receive payments and incur obligations in foreign currencies. Managers of foreign investment portfolios also face currency risk. A Japanese stock might gain 15 percent in value, but if the yen falls 15 percent, the stock gain is zero.18

Currency crises affect other local asset prices, including debt, equipment, and real estate markets. Firms face currency risk when their cash flows and the value of their assets and liabilities change due to unexpected changes in foreign-exchange rates. ...