11

Foreign exchange

Risk

Spot rates

Longer dates

Equivalence

Comparisons and arbitrage

Exercise

Summary

 

File: MFMaths3e_11.xls

RISK

Organisations face exposure to foreign exchange risk through adverse movements in rates. With any risk assessment it is necessary to understand the nature of risk and assess whether the effect is material and needing to be hedged or controlled, or is negligible and can be ignored. The costs of hedging may also be important in the decision process. Foreign exchange presents particular risks that can be divided into three categories:

  • Transaction risk arises from differences in interest rates. For example, a manufacturer takes an order and delivers goods in three months’ time. In the interim the exchange rate moves ...

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