International Financial Management Assignment Example | Topics and Well Written Essays - 2500 words - 1

International Financial Management - Assignment Example Fluctuation of the exchange rates between the different currencies the firm transacts through has the potential of exposing the firm to financial losses. The major exposure risk the firm is likely to experience is the transaction risk that distorts the cash flows realized. This is due to the recent behavior of the US dollar against major international currencies. The US dollar has of recent been depreciating against Euro and pound currency. Thus, the cost of the purchases the firm makes using dollar has the potential of increasing when it is converted to Euros or pounds in determining the profit earned. Consequently, it is critical for the firm to undertake measures to manage the exchange rate risks to mitigate probable financial losses in future. Managing the exchange risk facing a firm engaged in cross-border trade requires the management to determine the exposure risks been faced, hedging strategies capable of mitigating the risk and the existing instruments that can be used to cushion the exchange risks. This is done by adopting hedging strategies that help in reducing or eliminating currency risks. A number of hedging options are available in managing the exposure risks the firm faces under it cross-border trade. One of the hedging methods that can be used in managing the exchange risk facing the firm is forward contract. Forward contract allows a firm to exchange foreign currencies at an agreed exchange rate in future (Levi, 2009). Consequently, SN can undertake a forward contract that will guarantee the exchange rate that will be used in exchanging the foreign currencies in future date. The pre-fixed exchange rate that will be used in converting the foreign or domestic currency will counter the exchange rate fluctuation since the firm will be shielded by the agreement from such exposure. This arrangement will allow the firm to convert the Euros or Pounds it is possessing to dollar