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ABSTRACT: In the period of crisis the volatility of foreign exchange is one of most important elements to be consider in the risk management strategy at corporate level .The paper will focus on the main types of foreign exchange exposure, the role of hedging in managing the currency risk and the measurement of transaction exposure. The risk management in practice is illustrated by a case study designed to capture and contrast the effects of different types of options for hedging the transaction exposure.
Keywords: foreign exchange exposure, currency risk, hedging.
JEL codes: G30, F31,
Introduction
In the period of crisis the volatility of foreign exchange is one of most important elements to be considered in the risk management strategy at corporate level.
Foreign exchange exposure is the possibility of either beneficial or harmful effects on a company caused by a change in foreign exchange rates. The effect on the company may be on its profits, its cash flows, or its market value.
In some other words, foreign exchange exposure is a measure of the potential for a firm's profitability, net cash flow, and market value to change because of a change in exchange rates.
An important task of the financial manager is to measure foreign exchange exposure and to manage it so as to maximize the profitability, net cash flow, and market value of the firm.
Literature review
Reviewing the relevant literature on the subject some points should be retained as the starting point of the current approach (Moffett, 2009).
In analyzing the foreign exchange exposure three types of foreign exchange exposure should be considered:
Transaction exposure is the potential for a gain or loss in contracted-for near term cash flows caused by a foreign exchange rate-induced change in the value of amounts due to the multinational2 companies or amounts that the multinational companies owes to other parties. As such, it is a change in the home currency value of cash flows that are already contracted for. Transaction exposure measures changes in the value of outstanding financial obligations incurred prior to a change in exchange rates but not due to be settled until after the exchange rates change.
Thus, this type of exposure deals with changes in cash flows the result from existing...