Question

Firm A is a US firm that operates in France, Italy, Belgium, Netherlands, Austria and Spain. Firm B is also a US firm that operates in India, China, Brazil, Mexico, Germany, and Australia. Assume that both firms are in the same industry and that their financial characteristics (size, leverage, profitability etc.) are not significantly different. Which of the two companies do you believe will be more likely to experience a more significant operating exposure to currency risk? What methods of operating exposure management can you recommend as better suited for Firm A and for Firm B?

Answer 1

Firm A is operating in Europe which has only EURO as the currency, while Firm B is operationg in India, china, Brazil, Mexico, Germany and Australia having currencies of Indian Rupee, Chinese Yuan, Brazilian Real, Mexican Peso and Australian DOollar. Due to dealing in moste types of currencies, Firm B will have significant operating exposure to currency risk.

There are different methods to hedge foreign exchange risk like Forward contracts, Options, Swaps, investing in a currency exchange traded fund, Contract for differences(CFDs) and many more.

Based on the type and significance of the exposure, firms may choose the hedging techniques as required