Foreign exchange risk is a term used to describe a financial risk in a state by which there are differences in the exchange rates between two different currencies. This is a financial risk that is faced by individuals and investors who operate import and export businesses across the global business arena. This is a situation that requires fast and appropriate measures to prevent the dire consequences that are associated with it. Such risks affect majorly business growth, success as well as competition among the business partners. With such kind of dare consequences associated with these kinds of businesses it is very important that does careful determinations before going into such businesses. One need to consider factors such as the amount of risk that is to be taken, specific objectives and aims of the business as well as the past experience of such kind of business either personally or from others who had been there before. This therefore, demands that gets proper and accurate information related to these risks that would enable one to make informed judgments before venturing into such businesses. However much care needs to be taken before one does such businesses, it is also right to state such are always expected in the business field.
The foreign exchange risks usually occur as a result of three different kinds of exposure risks. Translational exposures occur when there is unanticipated exchange rate fluctuation between two different currencies. This may have very significant consequences on a given businesses’ cash flow system that may greatly affect the income. Transactional exposures occur as a result of changes in the exchange rates in the instance that is one influencial currency against the other. Economical exposures are those that happen when there is a significant change in the market value of a particular import or export commodity as a result of unanticipated exchange rate fluctuations. All these have dare consequences if adequate measures are not taken at the appropriate time to lower the occurrences of such risks if not complete preventions that may end up edging out very potential business investors out of the business arena.
In a quick rebound to lower the consequences associated with these unfortunate risks, different mechanisms have been put in place. These are the hedging and the non-hedging processes. However much these may work to at least lower the financial exchange risk, it is worth noting that these mechanisms too, have got shortfalls that may hinder their successful implementation to assist in the foreign exchange risk management. These occur in terms of the costs incurred, time consumed as well as complexity involved.
Hedging is a small investment amount put aside whose major work is to cater for potential loss or gain so that foreign exchange risk. Non-hedging on the other hand are strategies put in place to assist in the lowering of the foreign exchange risk though by not putting any amount initially to cater for such occurrences in the event they do. One possible option of non-hedge risk management strategy is through swap in which a contract is signed between the involved parties in which they state categorically the specific defined dates for the payment submission as well as other calculations done without any alterations to the agreed amounts. Passive Transaction is another essential non-hedge tool. In this case all the contracts relating to a particular transaction is dominated over as long as domestic currency is involved in the transaction.
Hedging on the other is the appropriate preparedness measures put ready to help lower the risk of foreign exchange causing great loses to a particular business. It is very difficult for one to predict the possible exchange rates in the near future. It can have both the upward or downward trend. These uncertainties are the flash lights that show that great and appropriate measures need to be taken to help a particular given business entity put up defensive measures. With hedging, there are several policies that can be applied for a successful implementation of the technique. One of the hedging methods that can be used to significantly lower the risk of foreign exchange risk is currency future contracts. This is a very workable strategy that would perfectly work to reduce the risk of foreign exchange significantly if all the involved parties would adhere and obey all the laid out procedures that are associated with its full implementation. This is however associated with so many hurdles as in most cases, the contracts are closed at dates prior to the delivery date resulting still to unavoidable loses in the foreign exchange. It is however very important to state categorically that hedging is done specifically to reduce the chances of bearing risks imposed by foreign exchange exposure by a particular business entity and not a profit making strategy for that particular business organization.
Another type of the hedging methods that can be used to lower foreign exchange risk is Forward exchange contract for currencies. In the type, there is an agreement between two involved parties of business entities to transact business deals through the buying and selling of particular goods or items at a later time in the future but at certain amount agreed on today. The price which the two business entities agree to at one specific time is known as the delivery price, which should always be similar to the selling price of that particular at the time the contract was entered. This agreed price is usually known as the forward price which is usually different from the sport price in which case is amount of a particular item at the spot time of exchange. Under this type however, the agreed amount of that particular item should however be paid in full before any change of control of the particular commodity takes place.
One very special feature about this type of contract is that there is no possibility of cancellation of the contract at any one particular other than where there is mutual agreement between all the involved parties. However much managing of foreign exchange risks is very important aspect of business prosperity for many investors, some do not take this factor seriously and operate on mere speculation that might have very dare consequences on their respective businesses. Some of them always believe on the hope that certain price changes would remain constant into the future or there would be any changes then the shift would be towards their advantage. However much this is a good policy to have, it is very open to manipulation when things go in the opposite direction to the one they were intended to.
In the case study of AD Plastics Exporting Company (ADPEC), the kind of risk they are undergoing is that of economic exposure, in which case the market value of a particular product is greatly affected by the fluctuations in the exchange rates. This is because ADPEC expects to pay for an import to a Japanese company in the next two months period during which the interest rates shall have gone up 10% thereby shifting up the originally agreed price. This ensures that the payment period, ADPEC has to cater for the additional costs as per the prices fluctuations then.
For economic sustainability of ADPEC very strict measures need to be taken to ensure that they do not experience a reoccurrence of such a foreign exchange risk. The undertaking of reducing the occurrence of the foreign exchange risk to the company is known as financial risk management, which in this case is foreign exchange risk management strategy. One of the management methods to be applied is Passive Transaction Risk Management. This is a management method dominating all contracts in domestic currencies. This would therefore to a greater extent, help ADPEC as by dominating the contract in domestic currency with the Japanese company, it would then enable ADPEC to pay the dues without any regard to the fluctuations in the interest rates of that particular country’s currency. This in turn would have saved ADPEC from such economic exposure. Another method would be hedging method from which ADPEC would have insured their risk and so would have come into a contract that would have seen both entities agree to the specified amount of JPY 200 million which would remain constant through the contract period regardless of the fluctuations in the interest rates in Japan. Another possible means through which ADPEC would have protected itself from foreign exchange risk is through swap. Swap is a type of an agreement signed between two parties in which the agreement defines the dates when the amount is to be paid and the way the calculations are to be made. This would ensure that any interest rates fluctuations later on would not affect the already agreed and calculated amounts.
For ADPEC was an importing company so that it expected to pay EUROs 2 million to the French company and to receive JPY 200 million a Japanese client in two months, the two best methods the company would employ is hedging and swapping. Hedging would be appropriate in that the company would cater for any forthcoming risks through an “insurance” kind of agreement that would take care of any future risk projections in the event that they occur. Swap on the other hand would ensure that agreement is put in place with specific payment calculations and durations that would not be affected in any way within the two months period under which the transactions are to take place.
In the event that ADPEC had a subsidiary in the UK and that branch repatriates profits of GBP 2 million to the parent company in Abu Dhabi every year. The EIBOR then exceeds the LIBOR by around 2 percentage points and this trend is expected to continue in the next two years because of the strong economic fundamentals in the UAE and weak conditions in the UK. The AED/GBP spot rate is AED6.5/GBP. The foreign exchange risk that would be associated with this kind of situation will be contingent exposure. With this kind of situation, the most appropriate action that ADPEC would take to limit the risks would be to implement a foreign exchange hedge of future contracts. This is a strategy that would be used as an alternative that would enable the management of both their economic and operating exposure. This would play a great role in the establishment of proper international policies that would be used to enhance greatly the risk reduction to the company.
Foreign exchange has been in the corporate business arena since time immemorial. It operates under the specific function of laying down the strategies and objectives to be followed by a firm or business enterprise in its quest to create a very conducive trading environment. It also helps in creating a mutual and moral understanding between the business and the external stakeholders to the business. On the contrary, there exists some problem between these objectives of the same process. Social gains are very minimal depending on the amount of IPRS administered to the immediate market. Similarly, an extremely weak system would greatly reduce the incentives used in the dissemination of the whole process. This would bring a very low return on the investment. This therefore calls for a balance between the two scenarios to help come up with a better solution for the stakeholders in the very business. These IPRS programs operate in very different styles and this implies that grouping them together will indeed lead to very misleading results in the final version of the project.
Trademarks are very important ways to protect the rights to the marketing of the commodities with specific names and symbols. They go hand in hand with the brand names. It is paramount for them to be very specific in the manner and way in which they operate in the financial sector of a business. It therefore helps the firm in reducing the consumer search costs at a very high rate. It encourages the firm to invest in name recognition and in the product quality. Licenses are also introduced to help control the system of trade in the market. These licenses ensure the production of very high quality goods in the market.
Firms develop some technologies that might not be patentable, may not worth the cost of applying for a patent, or might be more valuable if kept undisclosed. They prefer to keep knowledge of such processes proprietary as trade secrets, or undisclosed information. Trade secrets are protected by legal rules against learning by rivals through dishonest means. Such protection lapses if the technologies are discovered by fair means, such as independent invention or reverse engineering. Protecting trade secrets is beneficial to the extent it encourages the development and commercial use of sub-patentable inventions. Rules protecting trade secrets thus promote adaptive innovation and encourage learning through legal means. Literary and artistic creations and computer software are protected by copyrights, which provide exclusive rights for some period to copy and sell particular expressions of ideas after they are fixed in some medium. Related IPRS include neighboring rights of performers and broadcasters, moral rights of original artists, and copyrights for derivative products.
Patents are very paramount in the field of innovation and economic performance. Indeed this number has been in the increase right from the early eras of the economic slumps in the immediate market. Patents are used in the protection of inventions by public research organizations and other businesses and this contributes to the current increase in the number of patents in the evolution of innovative techniques in the business arena. Technology in Science has created a new wave in the invention of several factors in the business. This is notable in the information and technology field where the whole issue is pegged on the development of the internet in the business arena. An example where this has greatly influenced the production volume is the issue with Google Corporation that has developed a worldwide website and search engine utilized by almost every sector of the economy.
Intra firm technology transfer refers to the technological advancements and sharing taking place within the organization and in different department which could be of different levels within the structural organization of the firm. These could otherwise be referred to as the endogenous IPRS in a firm. The first analytical point to recognize is that national regimes of intellectual-property protection strongly depend on the level of economic development. Thus, the causation between IPRS and development operates in both directions. Indeed, that governments strengthen their IPRS systems as their economies become wealthier and attain a deeper basis of technological sophistication is well established. The claim that strong IPRS promote technical change and development is more debatable.
The developed economies had indexes that were both considerably higher and less variable than those of the middle-income and low-income developing economies. The increase in average protection from poor countries to middle-income countries was considerably less than that from middle-income countries to rich countries. Over time, there was a marked increase in the average index across nations. However, there was not much evidence of convergence between developing and developed countries until the 1990s.